The Hindu Business Line : S&P upgrades India currency rating outlook

`The country's fiscal weakness is the worst among rated sovereigns, leaving it particularly vulnerable to economic cycles and any decline in growth rates.'

Mumbai , Aug. 23

INTERNATIONAL rating agency, Standard and Poor's (S&P) has upgraded India's `BB' long-term foreign currency rating outlook to "positive" from stable.

The outlook on the `BB +' long-term, local currency rating has also been raised to stable from negative.

"The outlook revisions reflect India's improving external liquidity and better prospects for the governments debt burden to stabilise," said a press release, quoting Mr Bing Chew, credit analyst-Director in the sovereign and international public finance ratings group, S&P.

In addition, the country's robust foreign exchange reserves, which exceed 2000 per cent of the short-term debt, mitigate the risk of volatility in external confidence, he said.

S&P has affirmed all the ratings on India - foreign currency BB/Positive /B, local currency BB + stable/B.

The outlook on the Export-Import Bank of India's `BB' long-term foreign currency rating has been revised to positive from stable.

The sovereign ratings are supported by the country's good economic prospects, with GDP growth likely to trend over 6 per cent over the medium term. The service sector is dynamic, while the industrial sector is benefiting from gradual deregulation, trade liberalisation and modest improvements in infrastructure, according to S&P.

"Good economic growth could contain the pressure on India's already weak public finances, provided tax reform continues," said Mr Chew.

The country's external debt and debt service burden is expected to fall due to strong export growth and non-debt foreign capital inflows, which should help offset the impact of rising imports given the surge in oil prices.

The country's total external debt is likely to fall below 100 per cent of current account receipts for the current fiscal year ending March 31, 2005 compared with over 200 per cent in the fiscal 1993.

However, S&P has observed that the sovereign ratings on India remain constrained by high public debt and serious fiscal inflexibility. "The country's fiscal weakness is the worst among rated sovereigns, leaving it particularly vulnerable to economic cycles and any decline in growth rates," said Mr Chew.

Going forward, the timely and effective implementation of tax reform, along with steps to move toward a value-added tax, could result in more buoyant government revenues. Cautious debt management, deepening domestic capital markets, and rising private sector savings should continue to cushion the macro-economic impact of large fiscal deficits.

"India's foreign currency rating could be upgraded, provided the domestic debt burden moderates. On the other hand, if the fiscal deficit remains large and the debt burden continues to rise, the local currency rating could be lowered," said Mr Chew.