Market participants last week brushed aside Standard & Poor’s downgrade threat on India. The rating agency – despite Finance Minister P. Chidambaram’s repeated assurances to foreign investors (in his recent visits to various countries) on the Government’s commitment to reforms and hard selling India’s growth potential to them – has retained India’s sovereign rating at ‘BBB-’ with a negative outlook.
The current stand of another rating major Moody’s is ‘Baa3’. This rating is the last investment grade and equivalent to S&P’s ‘BBB-’
S&P had further warned that it may downgrade India’s sovereign rating to junk grade if the Government failed to pursue reforms and check deterioration in fiscal and current account deficits. S&P said there was at least a one-in-three likelihood of a downgrade within the next 12 months.
‘BBB-’ is the lowest investment grade and a downgrade would mean pushing the country’s sovereign rating to junk status, making overseas borrowings by corporates costlier.
The ratings agency, however, said there was scope to upgrade the sovereign ratings if the Government unleashes public and private investments to spur economic growth.
Market’s response
But the market’s response to the downgrade threat, particularly from foreign institutional investors, has reignited the debate about the significance of credit ratings agencies. FIIs remained net buyers to the tune of Rs 868 crore on Friday, exchanges data reveal.
Analysts were quick to point out that the BSE Sensex and the NSE Nifty surged over 25 per cent since S&P had downgraded outlook on India’s sovereign rating to ‘negative’ in April 2012.
Already empirical studies have proved that credit agencies lag behind the market when it comes to reviewing the creditworthiness. According to studies, when a rating change occurs, the market has already accounted for the information underlying the change.
From India’s perspective, FIIs are unlikely to cut down money flow unless a serious negative event occurs, as global markets are awash with liquidity. India appears to be relatively well placed compared with other emerging markets and that should drive FII flows.
Moreover, the Government is already addressing the issues flagged by the rating agency. Besides, most factors that were put forth by S&P for the negative outlook such as the worsening of the current account deficit and slowing reforms were already well known.
However, some warn that rating changes, particularly downgrades, do not systematically lag the market. According to them, credit watch is not defective most of the times and can provide new clues to investors.
Results this week
Apart from rating threat, domestic investors can watch out for financial performances of Coal India, which is scheduled to announce its standalone FY-2013 results on Monday; L&T unveils Q4 results on Wednesday; and Tata Steel, State Bank of India and Bharat Heavy Electricals will declare their Q4 results on Friday.
Local search engine Just Dial is all set to hit the capital market with an initial public offering on May 20, through which it plans to raise up to Rs 950 crore. Early this month, textile firm Scotts Garments was forced to withdraw its IPO even after an extension of the issue dates and a cut in the offer price failed to bring in investors.
badrinarayanan.ks@thehindu.co.in