New Delhi: Standard and Poor’s (S&P) revised India’s outlook to stable from negative on Thursday in the wake of finance minister Pranab Mukherjee’s pledge to rein in the fiscal deficit and improved growth prospects.
Graphic: Ahmed Raza Khan / Mint
This is expected to make it easier for Indian companies to raise foreign debt at lower interest rates and may lead to higher capital inflows due to improved investor confidence.
“It is sign of the market recognizing that this was a remarkably transparent Budget, serious about cutting back on fiscal deficit, and also the fact that this is the first time that a finance minister has set a definite target for reducing the debt-GDP (gross domestic product) ratio. The combined debt of the Centre and the states is to be brought down to 68% of GDP by 2014-15,” said Kaushik Basu, India’s chief economic adviser.
“This will help Indian firms to raise resources from the international market a little bit cheaper. This is due to a pickup in economic growth,” Reserve Bank of India deputy governor K.C. Chakrabarty told reporters in Mumbai.
The outlook revision pushed up bond prices on what was a volatile trading day—the yield on the 10-year benchmark 6.35% bond ended at 7.9% after falling to 7.81%, its lowest since 26 February, the day of the Budget during which Mukherjee announced his fiscal deficit target. It had ended at 7.95% on Wednesday.
S&P also reaffirmed India long-term sovereign rating at BBB-, the lowest investment grade, and short-term sovereign rating at A3, which is a medium ranking. Sovereign ratings reflect the ability of the government to repay debt.
“We believe this move is encouraging, and bodes well for the rupee as well as FII (foreign institutional investment) inflows. We expect further rating action given positive steps toward fiscal consolidation, the likelihood of implementation of goods and services tax later this year; and India’s favourable growth and external sector dynamics,” said Rohini Malkani, economist with Citigroup India.
The agency had downgraded India’s outlook rating from stable to negative in February last year after the interim budget, when the government pegged its fiscal deficit at 5.5% for the current fiscal.
Another rating agency Fitch last month reaffirmed India’s outlook for foreign currency at stable. However, its outlook for the local currency rupee remains negative. A senior official of the agency, who did not want to be quoted, said it would follow a wait and watch policy for the time being.
S&P said the outlook change is due mainly to the commitment to medium-term fiscal consolidation. The government aims to reduce the combined fiscal deficit (Centre and states) from 9.8% in 2009-10 to 8.3% in 2010-11, having in principle accepted the fiscal road map as laid down by the 13th Finance Commission.
“The stable outlook reflects our view that India’s fiscal consolidation at the Central, state, and public enterprise levels over the next several years will likely restore the government’s policy flexibility, and keep credit fundamentals commensurate with the BBB- rating. S&P’s will continue to monitor the government’s measures to rein in public finances,” it said.
The 13th Finance Commission recommended that the debt-GDP ratio of the Centre be cut to 45% by 2014-15. It has suggested that the Centre wipe out its revenue deficit and that the fiscal deficit should be reduced to 3% of GDP by 2013-14.
Apart from fiscal consolidation, S&P said the effort to reduce subsidies, particularly on fertilizers, and the hike in fuel prices are significant. The revision is also based on the expectation that the economy would grow at 8% in the next fiscal.
However, S&P said a high debt burden and an inflationary uptrend could derail the stable macroeconomic and interest rate environment, and result in downward pressure on ratings.
“We think the Reserve Bank of India and the government need to achieve a fine balance between their monetary and macroeconomic policies to contain inflation while maintaining the growth momentum of the economy,” it said.
Utpal Bhaskar, Reuters and PTI contributed to this story.