Improved political setting makes agency revise outlook to ‘stable’

On the back of what it called an improved political setting offering a conducive environment for reforms, global ratings agency Standard & Poor’s raised India’s sovereign outlook from “negative” to “stable.”

The upgrade signals a greater margin of safety on creditworthiness and thus improves India’s attractiveness as an investment destination to foreign investors. The benefits further extend to Indian companies as overseas borrowing rates come down. The stable outlook augurs well for the rupee that has weakened in the past week.

The S&P cited two reasons for the change in outlook. First, a stronger political mandate improves the government’s ability to implement reforms, spur growth and improve its fiscal performance. Then, India’s external account has improved.

At the time of the 15th Lok Sabha election, the S&P said it was watching India for structural reforms, adding that the direction and pace of policy reforms, rather than which political party would come to office, would affect the sovereign ratings.

With the S&P upgrade, all three major global credit agencies have now placed India’s sovereign rating at the lowest investment grade but with a stable outlook. S&P cut India’s rating to “BBB-minus” in April 2012.

All eyes are now on a ratings upgrade, which, S&P said, would be contingent on per-capita gross domestic product trend growth rising to 5.5 per cent annually. This translates into a GDP growth rate of 6.5 per cent to 7 per cent. A failure to implement reforms or deterioration in the fiscal or the external situation could trigger a rating downgrade, S&P cautioned.

Reacting to the news of the upgrade, Finance Secretary Arvind Mayaram told presspersons that he expected the economy to grow faster than 5.5 per cent in the current fiscal year.

After the news of the upgrade came, Sensex ended higher at the close of trading on Friday, snapping a three-day losing trend, rising by 157.96 points to 26,626.32.

(With additional inputs from agency)