S&P revises outlook for India to stable

Standard & Poor's Ratings Services has revised the outlook on India's long-term foreign currency rating from negative to stable on the back of increasing forex reserves. But it refrained from revising the long-term foreign currency ratings, which remain at a sub-investment BB.

Nor did S&P change the outlook or rating of India's long-term local currency rating, which stays at 'BB+' with negative outlook.

S&P said this was due to the government's continuing difficulty in addressing fiscal problems and structural reforms. Both foreign and local currency short-term ratings were affirmed at 'B'.

"Rapidly increasing external liquidity, sustained by growing foreign exchange reserves (exceeding 700 per cent of short-term debt), and modest debt service payments sparked the revision in the foreign currency outlook," said Standard & Poor's credit analyst Takahira Ogawa, Director Asia-Pacific sovereign ratings group.

The forex reserves is around 490 per cent of India's gross external financing gap (current account deficit plus amortisation and short-term debt) in 2003, compared with 90 per cent or so in similarly rated countries.

According to the rating agency, this is a major supporting factor for the sovereign ratings for India. India had forex reserves of $97.52 billion, which was likely to cross $100 billion by the end of the calendar year, S&P said.

In October, competing ratings agency Moody's Investors Service had placed India's Ba1 foreign currency debt rating on review for a possible upgrade to the investment grade.

Moody's, too, had cited India's rising foreign exchange reserves as a positive factor, even as it reaffirmed the negative outlook on India's domestic debt rating.

It was only in February this year that Moody's upgraded India's foreign currency debt rating from Ba2 to Ba1, one step short of the investment grade. But Moody's action had placed its rating one notch higher than S&P's current rating.

Fitch Ratings, too, had in February affirmed India's long-term foreign currency and local currency ratings at 'BB' and 'BB+', respectively.

According to a senior banker, "India is still below the sub-investment grade. S&P has been bearish on the country, compared with other rating agencies. It is time for a rating upgrade to investment grade, which will open a whole lot of investment opportunities."

But the equity markets welcomed the upgrade, saying it opens the doors for more inbound investments.

Gul Tekchandani, chief investment officer, Sun F&C, said: "This (upgrade) will help to attract more investors to the country as they will perceive this as an incrementally stable investment environment. Normally when FDI inflows improve, portfolio managers follow suit." He added that foreign ownership in the Indian equity markets is at about 10 per cent, which is significantly lower than in other Southeast Asian markets.

Sumant Sinha, group president (corporate finance), AV Birla group said, "The S& P rating is very harsh on India compared with other countries having similar ratings. The ratings are constrained due to our fiscal deficit situation."

However, he points out that any rating upgrade is a positive development.

"This should be taken in perspective that it is not a free market for companies as they can borrow to a limited extent abroad considering the government's recent policy on external borrowings."

Besides, Indian corporates raise funds at a much attractive rate, compared with corporates from similarly rated countries.

P Sugavanam, director (finance), Indian Oil Corporation, said, "It is good that S&P has revised India's rating outlook. We (Indian Oil Corporation) are linked to the sovereign rating. I hope it is extended to investments so that I can knock off some basis points from my foreign loans, say 1-5 basis points".

Pravin Kadle, executive director of corporate affairs and finance, Tata Motors said "The Indian economy and the corporate sector have been doing very well and the general perception is that this good run will last for some time now. Indian companies are now scouting around for growth and investment opportunities and the revised outlook brings good news as it will provided Indian companies more fund -raising opportunities outside India. This will also lead to renewed interest from foreign investors in the Indian corporate sector."

YM Deosthalee, chief financial officer, Larsen & Toubro, said the upgrade was expected.