BBB effect: India’s S&P rating upgrade should cheapen loans and draw capital
A sovereign credit rating upgrade by one of the world’s big three agencies has come just as our economy’s strength needed affirmation. S&P’s upgrade vindicates India’s argument while easing private access to capital and enabling greater inflows.
The big three of the global credit rating business, Standard & Poor’s (S&P), Moody’s and Fitch, have a dominant market presence. While one could dispute their rationale behind a rating, the market accepts their assessments, which is what matters when any company is borrowing overseas.
Therefore, while the Indian government does not borrow in the global market, since its debt is denominated in rupees, all Indian companies encounter the impact of a global rating as their own rating is benchmarked with that of the sovereign.
While some corporations may have a higher rating of a notch or two, depending on their global business, the creditworthiness of most Indian companies is tied to the sovereign rating. Their cost of borrowing , thus, depends on how the world’s big three rate the government as a debtor.
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The government has been trying to convince these agencies that India deserves a much higher rating. The country’s growth story has been one of the best in the world, both before and after covid. Fiscal consolidation has been pursued in the best possible manner and the external account has been robust with low current account deficits and strong capital inflows. All this has been under a stable inflation environment. This is the context in which India’s recent rating upgrade by S&P should be viewed.
On 14 August, S&P upgraded India’s rating to BBB (with a stable outlook) from BBB (-). It is still in the BBB bracket, though; we can hope that the outlook changes over time to positive before the rating moves into the BBB (+) category and then enters the A bracket, which would put us in the top league. The US is rated AA (+), as is the EU. China and Japan are in the A (+) category, while Italy is BBB (+). Mexico and Greece are also in the BBB bracket.
It has been noticed that these rating agencies are very quick to downgrade countries when things are not right, but take their time to upgrade them for improvements. Since various financial parameters are kept under watch for extended periods, we may have to wait patiently for future upgrades.
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The S&P upgrade comes at a critical time for us, given the uncertainty over a tariff of 50% being imposed by the US on imports from India. S&P believes that the impact of this tariff will not be significant enough to hurt our growth story and sees Indian GDP growing by an annual 6.8% in the next three years. This buttresses the view that India’s path is upward. Proactive policies can be credited for much of this. The downward glide path of the Centre’s fiscal deficit, coupled with its commitment to lower the debt-to-GDP ratio, has been a driving factor behind S&P’s decision.
The rating agency has also applauded the quality of India’s budget spending. Outlays have moved more to capital expenditure, with control exercised over non-developmental expenses. In fact, successive budgets have streamlined central expenditures, especially subsidies, and turned finances more transparent. This has helped support investment in the economy through infrastructure development.
Further, the rating agency has also assuaged concerns on the secondary tariff threat that sprang from American disapproval of oil imports from Russia. Given that India imports around a third of its requirements from Russia, S&P does not see again a significant impact on the country’s oil bill and hence external account. India’s current account is comfortably placed today and any increase in oil import costs can easily be absorbed.
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Broadly, how should we view this change in rating? First, it is a vindication of the longstanding argument that India deserves a higher rating. Second, its timing is fortuitous and sends a strong signal on the strength of the Indian economy. Even purely from the point of view of prestige, this rating upgrade is worthy of celebration. Third, an upgrade usually makes a case for other agencies to review their stance on India, so other upgrades in our rating or outlook could be on the cards. Fourth, Indian companies should benefit from this upgrade as their cost of borrowing could come down by 5-10 basis points, depending on their domestic rating. AAA-rated companies in India could benefit the most. Given the tendency of several businesses to go for external commercial borrowings (at lower rates of interest), this is important.
India has been a favourite destination for foreign investment for quite some time now. A relentless domestic focus on improving the ease of doing business has been a big ‘pull’ factor. Almost all sectors are open for foreign direct investment and the size of the market has already drawn all major brands to the country. Hence, notwithstanding India’s sovereign rating, global companies have invested heavily here.
The same holds for foreign portfolio investment, with Indian equity valuations reflecting the growth potential of the economy. The recent inclusion of Indian bonds in global indices was another strong message that India is a major economic force. S&P’s rating upgrade should now induce more fund houses to invest in India, especially those bound by allocation ratios based on sovereign ratings. This augurs well for future inflows.
These are the author’s personal views.
The author is chief economist, Bank of Baroda, and author of ‘Corporate Quirks: The Darker Side of the Sun’
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