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Why India is unlikely to see rating upgrade soon

India received a shot in the arm as global rating agency Standard & Poor’s on Friday revised India’s credit outlook to “stable” from “negative”, acknowledging the improvement in the country’s economic environment.

The revision was backed by an improvement in India’s external position and growth prospects and means it’s no longer on the brink of a “junk” rating. S&P was the last of the three main global ratings agencies with a negative outlook on India; Moody’s never changed India’s outlook, while Fitch upgraded it to stable in 2013.

Although Moody’s outlook on India remains stable, Andrew Colquhoun, Head of Asia-Pacific Sovereign Ratings Group at Fitch Ratings doesn’t see any chance of an alteration in ratings for India in the medium-term.

In an interview with CNBC-TV18’s Latha Venkatesh, Atsi Sheth, Senior Vice President, Moody’s also does not expect a change in rating for India soon. She says that the agency will look at Reserve Bank’s views on inflation trends, macro outlook and growth sustainability before any ratings action.

Below is the verbatim transcript of Andrew Colquhoun and Atsi Sheth’s interview:

Q: The last of the rating agencies have also made their outlook, converted their outlook to stable on India. How long would it be before Fitch upgrades the rating itself?

Andrew: Fitch have found India’s rating at BBB minus with a stable outlook in April and at that time we highlighted a number of positive or negative rating drivers. So things that would plead us to review the rating positively would include a sustained fiscal consolidation, bringing down the fiscal deficit, stabilising and reducing government debt levels which remain higher than peers in the BBB range. As well of course, this progress on reforms from the new government and continued progress on the RBI side in bringing low and stable inflation.

Q: Have you noticed progress on any of these parameters since April enough to make you pounder about a rating upgrade for instance a 4.1 percent fiscal deficit was announced with the manner in which we have seen diesel prices increase that is subsidies reduced as well as the global fall in crude prices. Are you getting a sense that this parameter itself has improved?

Andrew: On the Budget front, it was interesting that the new government reaffirmed the outgoing government’s fiscal deficit target. From our perspective, it remains a little difficult to see exactly how we get to that 4.1 percent union deficit. In particular, there is an assumption for divestment revenue that is quite optimistic.

Recent experience has been that when divestment revenues fall short the government responses by coming back on capital spending to keep the deficit within target and that is obviously something that has an impact on longer term growth prospects. So it remains to be seen whether the new government can find more supportive formula on the fiscal front.

Q: Do you find any of the parameters improved enough for the market to expect a rating upgrade anytime in 6-12 months?

Andrew: Our stable outlook on the ratings as we see the pressure on the rating is broadly balanced over a 12-18 months timeframe. So we are not expecting rating action eminently.

Q: So you don’t see any eminent chance of a rating action?

Andrew: That is correct, that is what our stable outlook is signifying. Of course, all our ratings remain subject to review at all time and as things change then of course we will change the ratings.


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