The Hindu Business Line : S&P upgrades foreign currency rating

STANDARD & POOR'S today upgraded its long-term foreign currency rating on India by one notch to `BB+' with a stable outlook. The agency also affirmed the long-term local currency and short - term ratings at `BB+'.

The `BB+' rating is still below investment grade, though only one notch.

The upgrade on the foreign currency reflects India's improved external position and growth prospects, the agency said in a press release.

India's external position - stronger than all other sovereigns in `BB' rating category - is resilient and likely to be maintained in the coming years, the agency noted. The country's foreign exchange reserves mitigate the risk of volatility in external and domestic confidence. "The strong growth in export earnings, particularly from the service and manufacturing sectors, as well as non-debt foreign capital inflows should alleviate the impact of rising imports. India's external debt and debt service burden is expected to fall in the years ahead," the agency said.

S&P is the third international credit rating agency to upgrade India in the past year. Moody's Investors Service upgraded India's foreign currency debt to `Baa3', or investment grade, from `Ba1' in January 2004. Fitch Ratings also upgraded India's foreign debt in January 2004 to `BB+' from `BB'.

India's external balance sheet has strengthened markedly, due to reserves accumulation and prudent debt management, which should lower the external liquidity risk from its fiscal vulnerability, Mr Ping Chew, Director, Sovereign and International Public Finance Group of S&P was quoted in the release.

Further, S&P said that India's economic prospects are good with GDP growth likely to hover at 6.5 - 7 per cent in the medium term. The service sector is dynamic, while the industrial sector is benefiting from gradual deregulation, trade liberalisation and modest improvements in infrastructure. The business environment is likely to improve in the coming years, sustaining private investment and economic growth. The banking system has also improved with reforms; it can now support a higher economic growth while reducing the contingent risk on the Government, the release said.

S&P also raised its long-term foreign currency rating on the Export - Import Bank of India by one notch top `BB+', in line with the upgrade on the sovereign credit rating.

The stable outlook on the ratings reflect the expectations that the pace of the fiscal correction, further improvements in the external sector and lifting India's potential growth rate substantially will be gradual.

The principal risk to India is generated by a weak profile, especially its high deficit and debt, and serious fiscal inflexibility, which is one of the worst among the rated sovereigns, the release said. Although the Central Government has stepped up efforts to rein in the deficit, the consolidated Central and State Government deficits will amount to 10 per cent of the GDP in the near term, which will push the ratio of general Government debt to GDP higher, from more than 80 per cent currently. The public sector, especially the electricity sector is also inefficient, the agency noted in the release.

Banks' rating up: Following this upgrade, S&P also raised its long-term foreign currency

counter party credit ratings on State Bank of India and ICICI Bank to `BB+' from `BB'. The short-term foreign currency `B' ratings on SBI and ICICI Bank were affirmed. The outlook on both banks is stable, the agency said in a related press release.

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