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FEB. 25, 2007
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Business Today,  February 11, 2007
S&P And After
For the first time in 14 years, international credit rating agency, Standard and Poor's (S&P), has raised India's credit rating to investment grade. S&P is the last of the three major international rating agencies to do so. Moody's Investors Service did it in January 2004 and Fitch Ratings in August 2006. The upgrade is likely to spur the flow of foreign investment into power, steel and other industries, which receive less than a tenth of the funds going China's way.

S&P raised its rating for India from BB+ to BBB-, technically, a raise of only one level, but one which crosses the crucial threshold to investment grade. S&P cited India's strong economic prospects and external balance sheet, deep capital market and an improving fiscal situation in raising the rating to the lowest rung of investment grade at BBB- from a speculative grade BB+/B.

The economy has averaged growth of about 8 per cent over the past three fiscal years. In the first half of the fiscal year 2006-07, it grew at an annual pace of 9.1 percent. S&P said further upgrades would depend on sustaining policies to bring down government debt and the interest burden, and reforms that would lift growth prospects and income levels.

However, some people are asking if the hike in ratings to investment grade make a big difference for the Indian economy. They ague that India has received over $60 billion in foreign portfolio investments and direct investment in the last three-and-half years and moreover, there is about $30 billion of outstanding commercial borrowings. These duly are an acknowledgement of India's economic prospects, strong external sector and improving government finances.

Investments in shares helped India's foreign-exchange reserves to rise to a record $178.13 billion in January, according to central bank data. India has the world's largest reserves of foreign exchange.

To add to the growth story, the Indian banks are now taking baby-steps in the US, UK and Asia Pacific region. In the years to come a substantial portion of the revenues of these banks' will come from their overseas operations. The growing interest of the private equity firms in India is also a case in point.

The market already knows and has discounted all the information that goes into the ratings. That the rating agencies failed to anticipate the Asian crisis of the late 1990s and the Enron fiasco has also eroded their credibility.

However, the upgrade does have subtle and long-term implications. The surfeit of liquidity has substantially increased the global risk appetite, enabling even second rung Indian companies to raise capital easily.

But capital such as pension funds, which is more stable and long-term oriented, is yet to come into India in a big way. The S&P upgrade could help make that happen, as most such funds are constrained by their mandate to invest only in investment grade paper.

And in the event of different ratings they usually go by the more conservative one. Now that all the three major rating agencies - S&P, Moody's and Fitch -have India as investment grade, even the conservative money can flow into Indian markets, which would particularly help infrastructure financing.

Higher sovereign ratings will also help local companies and banks to sell bonds overseas. Bank of Baroda plans to sell as much as $1.5 billion of medium-term notes to finance overseas expansion. In January, ICICI Bank sold $2 billion of dollar-denominated bonds, the most raised overseas by an Indian company, to meet demand for loans as the nation's middle class grows.

But India needs to worry about foreign inflow of capital, which pales when compared to the money that goes into China. Foreign direct investment (FDI) into India is still weak. From April 2005 to March 2006, India received $5.7 billion in FDI, less than a tenth of China's $60.3 billion in the same period. The Indian government expects FDI to rise to around $10 billion in the year to March 2007.

Also, due to India's weak fiscal profile, ratings remained constrained and, moreover, its high Government debt burden and deficit, is still one of the worst among all rated sovereigns. The ratings agency called for more reforms to improve India's public finances and lift the sustainable growth rate, saying large government deficits remained a risk and that inappropriate policy could put the ratings under pressure.

However, markets gave a thumb up to the S&P's ratings. Buoyed by the upgradation of the country's rating to investment grade, the Sensex closed at an all-time peak of 14,403.77 on February 2.