Will S&P, Moody’s follow suit?
By R. Chandrasekaran
CHENNAI: Fitch’s upgrading of India’s credit rating has come as a big sentiment booster, at a time when the country is facing several economic problems. For the Indian officials, who were under a possible downgrade threat from Standard & Poor’s and Moody’s, it is a big relief.
The stock markets had lost around 2.9 percent, or more than 560 points, in June alone, as a result of the flow of unfavorable news coming from various quarters. The weakening of rupee to a record low, which limited any chance of a further monetary policy easing, slower growth of factory output, moderate inflation, strengthening of US dollar following the S&P’s rating, and curbing of gold imports in the aftermath of two months of strong gold imports have all hurt market sentiments one way or the other in June alone.
The Reserve Bank of India Governor D. Subbarao had also spoken about continued risk of higher inflation threatening to hold on to easing of monetary policy. His comments assumed significance as the rupee is sliding and the oil companies have to shell out more dollars, which, in turn, will impact the current account deficits, as well as lift the inflationary pressures.
Under these circumstances, Fitch upgrading the credit rating to stable from negative is a shot in the arm for the finance ministry, which also held a series of meetings with the representatives of rating agencies in May to seek an upgrade.
While S&P and Moody’s had earlier viewed some of the government’s recent actions on foreign direct investment in retail sector and sops for exporters, as positive, they did not deem them enough to warrant an upgrade. But Fitch said that its upgrade reflected the measures taken by the government to limit the budget deficit, commitments made in the fiscal year 2014 budget proposals and progress made in addressing some of the structural impediments to investment and economic growth.
The rating agency also said that the government could succeed in limiting upward pressure on its budget deficit especially in the sluggish economic market conditions. Another factor behind the Fitch move was the possibility that the government could limit its fiscal deficit to 4.9 percent of the gross domestic product in fiscal year 2013 on top of the 5.7 percent recorded in the preceding year. Also, when Fitch put India on negative outlook, fiscal deficit was close to 6 percent.
Secondly, the formation of a Cabinet Committee on Investment to speed up project clearance also played a role in the rating agency’s decision to lift the outlook on India, apart from the expected benefits on reforms like the new land acquisition bill.
The current account deficit, which is a bone of contention for rating agencies, continues to face pressures. Yet, Fitch considers that India’s debt is moderate and the RBI’s international reserves of $288 billion at the close of May could provide a cushion to face any adverse external shocks.
However, it cautioned that economic recovery will be slow till a healthier investment climate is created. The rating agency expects India’s GDP to come at 5.7 percent in the current fiscal year and 6.5 percent in the next fiscal year, which are below the government’s projection.
Now that Fitch has upgraded India, the question is whether S&P and Moody’s follow a similar move. The two ratings agencies haven’t given any indication that they will. In fact, if they don’t downgrade India on the back of a strengthening dollar, slow growth of factory output, and the threat of higher inflation, it will be a relief.