Ratings agency Standard & Poor's raised India's credit outlook to “stable” Friday, saying the prospects for reforms and fiscal management had grown under the NDA government in a vote of confidence ahead of Prime Minister Narendra Modi’s maiden visit to the US.
This marks a sharp turnaround on how overseas think-tanks and investors perceive India as an investment destination after the new government has assumed office.
Although S&P kept its main sovereign credit rating unchanged at "BBB-", the agency said it was "revising the outlook on the long-term rating to stable from negative" as it expected growth rates to pick up pace.
"The stable outlook reflects our expectation that the newly elected government will be able to implement reforms that spur growth, which in turn improves fiscal performance," it said in a statement.
Over the last two years, global credit rating agencies had been unsparing about their criticism of the previous UPA government’s management of the Indian economy, which has been hit by a policy gridlock and a string of tax disputes, in recent years.
“Although the paralysing effect of legislative gridlock can blunt government effectiveness, our outlook revision indicates that we believe the current government's strong mandate will enable it to implement many of its administrative, fiscal, and economic reforms,” S&P said Friday.
The remarks triggered a sharp rebound in currency and equity markets.
The BSE Sensex closed trade 158 points or 0.60 % to close at 26,626.32. The rupee ended stronger at 61.14 to a dollar on Friday from the previous day’s close of 61.34.
This will raise prospects of probable upgrade in “sovereign ratings”—a measure of a country’s credit-worthiness that influence investment decisions.
“We could raise the rating if the economy reverts to a real per capita GDP trend growth of 5.5% per year and fiscal, external, or inflation metrics improve. Conversely we may lower the rating if the government's structural reform agenda stalls such that economic growth does not accelerate, or fiscal and debt ratios fail to improve,” it said.
India’s current sovereign rating “BBB-“ is a notch above “junk” that have a strong default likelihood.
Ahead of the Lok Sabha elections, S&P had warned that it could downgrade the country's sovereign ratings if the next government does not appear capable of reversing India's low economic growth.
The latest commentary could be signs that perceptions about India could be changing.
"India's improved political setting offers a conducive environment for reforms, which could boost growth prospects and improve fiscal management," S&P said.
Asia's third-largest economy is showing signs of clawing out of its longest slump in a quarter century, and Modi’s landslide election victory has raised hopes that he will be able to engineer a quick turnaround.
The commentary by S&P, which also upgrade the credit outlook of 15 other Indian companies and financial institutions in a separate report, came a day after Modi unveiled his signature "Make in India" initiative Thursday vowing to remove red tape and ease rules, and pledged a non-adversarial governance regime to push companies to make India a manufacturing powerhouse.
The initiative is aimed at making India an investors’ darling by removing irritants, bottlenecks and regressive policies often blamed for scaring away companies.
“It (S&P’s outlook upgrade) will improve investor confidence and improve companies’ access to international funds,” said Chandrajit Banerjee, Director General, CII, an industry body.