S&P Outlook Change — A Bit Late, Though Welcome

The global credit rating agencies have historically tended to have a very single-dimensional view of the emerging markets and tend to give a lower rating compared to their developed counterparts. This is now a normal and while there have been several arguments and presentations made to prove that countries like India should have a higher rating, it has not been accepted by them. While it is possible to ignore these ratings from a sovereign standpoint, as the Indian government does not borrow from overseas markets, Indian companies are handicapped when accessing global markets as the rating comes in the way.

Against this background, the S&P change in rating outlook to 'Positive' from 'Stable' is a good step. It can be said that this was long overdue, as the economic parameters have been quite exemplary post-pandemic. In fact, even before Covid-19 struck, the Indian economy had exhibited very strong fundamentals that justified a rating upgrade. It has been acknowledged that during the pandemic, the government and RBI handled policy with a high degree of cogency, thus making the rollback post-Covid easier. This has not been the case with other nations, which are struggling to get back to normal.

An example that can be given is in the area of monetary policy. India has historically had a repo rate of 6–6.5%. When Covid struck, it was lowered to 4% and is now back to 6.5%. This has happened unobtrusively, as it has been rolled back to normal. In the West, rates were lowered to close to zero and then scaled up to high levels, which makes rollback a challenge.

The change in outlook to positive is due to both the maintenance of the high growth path that was registered in the last few years as well as the positive policies being pursued by the government.

India has been the best-performing large economy for the last three years and will probably retain this spot for the next two years. This growth has come about in a measured manner, with all sectors showing an upward trajectory. The government has taken the lead in capex and, hence, investment, and the private sector story is to play out soon, which will add to the growth process.

Similarly, while consumption has revived due to the pent-up demand phenomenon, inflation has not allowed its full potential to emerge. With inflation likely to trend downward (core inflation is already low at around 3%), there is reason to believe that consumption will pick up faster, thus enhancing the pace of growth.

On the external front, the balance of payments has been well managed. The forex reserves have scaled upwards to close to $650 billion, thanks to a low current account deficit of less than 1.5% and very good capital inflows. The inclusion of government bonds in global indices means that there will be more FPI flows along with FDI, which will strengthen the capital account and hence the currency. Therefore, there will be a very stable rupee with a bias towards appreciation rather than depreciation. This does credit to the policies pursued by the RBI. In fact, when the dollar strengthened after the Ukraine war, the rupee was one of the better-performing currencies, thus ensuring stability in the market.

Interestingly, S&P has indicated that it would be looking at an upgrade in case the fiscal house is in order. A fiscal deficit ratio of 7% has been spoken of. Here, there has been substantial progress made in the last couple of years. The central government has been rolling back the deficit and it is very likely that the 4.5% target will be met in FY26. States, too, have followed fiscal prudence and lowered their deficits—in FY24, the overall deficit going by provisional numbers for 25 states was 16% lower than budgeted. Hence, keeping the deficit below 3% looks very likely and by FY26–FY27, the combined ratio could go below 7%.

Therefore, it does look like the S&P playbook will be met on all counts in a maximum of two years, and under normal circumstances, there should be a rating upgrade too. Ideally, one can argue for a two-notch upgrade, though more likely it would be a single one. The change in outlook is a positive signal to the market as well as other credit rating agencies, which may also do a review and consider a similar action.

The change in outlook should have been made much earlier. The only explanation for this delay that can be given is that the rating agency wanted to be sure before taking any action, as most economic numbers have been affected by the ‘noise’ factor of base effects, following a sharp decline during the pandemic. At any rate, this is good news for the country as well as for companies that have been progressively accessing global financial markets for funds.

Madan Sabnavis is Chief Economist at Bank of Baroda.

The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team.