In a boost to govt, S&P revises India outlook to `stable'





First Such Rating Since Modi Took Over

After years of pessimism on the economy , there were finally signs of positive perception on Friday as Standard & Poor's revised India's rating outlook from `negative' to `stable'. This indicates that there are fewer chances of government and other public sector bonds being treated as junk papers.

The revision is the first measure undertaken by any rating agency since the Modi government took office about four months ago, "Our outlook revision reflects our view that India's improved political setting offers a conducive environment for reforms, which could boost growth prospects and improve fiscal management," S&P said in a statement, which coincided with PM Narendra Modi's US visit, where he will court international investors.

Although India still retains the lowest investment grade rating of BBB+, the news made the rupee gain the most in six weeks and closed 61.15 to a dollar, compared to 61.35 on Thursday . Bond prices too strengthened on expectation that a better outlook may result in higher investment and more dollar flows into the economy .

Besides, it raised hopes of a rating upgrade in the coming months. Finance secretary Arvind Mayaram said the agency is expected to upgrade India's rating in the future."The country is well on a path of faster than anticipated fiscal consolidation and it could be a positive surprise going forward," SBI chief Arundhati Bhattacharya said. But S&P—the only major agency that threatened a downgrade of India's rating in the wake of rising current account and fiscal deficit in April 2012—said it will wait for the economy to grow faster and the fiscal, external or inflation parameters to improve before it decides on an upgrade. It cited at least two constraints—India's weak public finances that may stay weak for some time and low per capita income, which results in a low tax base and gives the government less flexibility in taking dramatic measures during times of economic stress.

The change in S&P's outlook was, however, driven by several factors, which included an improvement in the current account situation on the back on curbs on gold imports as well as India's credit strength, from low level of foreign debt and improved cash availability overseas. The country's "well entrenched democratic political system" and the strong electoral mandate were cited as the third key reason by the agency. "Although the paralyzing 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."

The ratings company said it expected the government to adhere to the fiscal consolidation plan and estimated an improvement in the fiscal performance due to the possible rollout of goods and services tax (GST)--something that the BJP government has identified as a key thrust area.