NEW DELHI: Standard & Poor’s lifted India’s rating outlook to ‘stable’ from ‘negative’, acknowledging efforts by the Narendra Modi government to maintain fiscal discipline while reviving the economy and drumming up investment, giving the prime minister a timely boost as his key US trip gets underway. Stocks ended a three-day losing streak and the rupee strengthened as the international rating agency reversed the stance it took two years ago that had prompted former finance minister P Chidambaram to embark on drastic belttightening measures to prevent a downgrade to junk status.The outlook revision, which comes four months after the Modi regime took over, signals the beginning of the country’s journey towards a possible rating upgrade and higher capital flows.

The announcement cheered the markets with the BSE Sensex recovering from six-week lows and the benchmark 10-year bond yield dropping 5 basis points to 8.44%. The rupee also recovered, ending at 61.14/15 to the dollar compared with Thursday’s close of 61.34/35. The rupee fell to 61.62 during trade, the Indian currency’s lowest since August 8.



“The stable outlook for the next 24 months reflects our view that the new government has both the willingness and capacity to implement reforms necessary to restore some of India’s lost growth potential, consolidate its fiscal accounts, and permit RBI to carry out effective monetary policy,” the agency said, adding that it could raise the rating if the economy reverted to a real per capita GDP trend growth of 5.5% per year and fiscal, external, or inflation metrics improve.



The agency affirmed the BBBlong-term and A-3 short-term unsolicited sovereign credit ratings on India, according to a statement on Friday. Its peers Moody’s and Fitch have already raised their outlook to positive. S&P had cut India’s rating outlook to negative in April 2012.



S&P hoping for action from Modi regime

Plummeting investor confidence, a perception of policy paralysis and fiscal slippage brought the country to the verge of a rating downgrade to junk that would have triggered a flight of foreign capital.Fearing this, the previous UPA government put in place a new fiscal consolidation plan, raised the import duty on gold in stages to 10% from 2% besides putting other curbs in place after the current account deficit (CAD) swelled to a record 4.7% of GDP in FY14.The current government, S&P said, “will remedy, to varying degrees, the growth impediments — policy paralysis, energy supply bottlenecks, and administrative obstacles. The government's actions will likely add momentum to the incipient cyclical upswing evident in the economy… We project real per capita GDP growth to reach 5% by next year, and per capita GDP to surpass $2,000 by 2017.”Business confidence has seen an upsurge after the landslide victory of the BJP-led NDA in May, reflected by the increase in foreign portfolio inflows. GDP growth rose to a nine-quarter high of 5.7% in the April-June period, signalling a recovery after two years in which it slumped below 5%, hitting decadal lows.Finance ministry officials welcomed the announcement saying they expected the economy to grow faster than 5.5% in the current financial year. “We are satisfied that the credit rating agency has acknowledged the steps the government has taken to improve the economy and specially to bring the investment cycle back and therefore the growth cycle back,” Finance Secretary Arvind Mayaram said.Later in the day, the finance ministry announced a Rs 8,000-crore cut in overall market borrowing, a clear indication of emerging confidence that recovery has set in and that fiscal consolidation was very much on course. Sentiment is buoyant the rating agencies will be even more positive about India in the near future.“The fact that they are acknowledging that the government has the wherewithal and the commitment to bring growth back and they have also indicated that the growth is 5.5%, then there is likely to be an upgrade. We are very confident that this year it's going to be 5.5%, in fact higher than 5.5%. So there is a clear indication that going forward there is something more positive,” Mayaram said.Economists and industry cheered the announcement, hopeful that there could be a rating upgrade soon. S&P's action is a reflection of India's sound external position, supported by robust capital inflows and a benign CAD, State Bank of India Chairman Arundhati Bhattacharya said.Citi economist Rohini Malkani said: “This was in line with expectations and now puts S&P’s rating outlook at par with Moody’s and Fitch. Going forward, if the ongoing process of macro-stabilisation continues, we would not be surprised if rating agencies upgrade the sovereign outlook to ‘positive’ in the coming 12 months.” The Confederation of Indian Industry welcomed the move.“It will improve investor confidence and improve companies’ access to international funds,” CII said. “The outlook revision was based on the strong mandate received by the new government, which has enabled it to implement policies that will revive growth and boost investments.”