Impact of rating upgrade by S&P

S&P has raised India's sovereign debt rating to investment grade in view of the country's strong economic outlook, its rising foreign exchange reserves and the depth of financial markets.

The Indian economy has registered an average growth of over 8 percent in the past three years and is expected to grow at a record 9 percent in the current fiscal year ending March 2007. The rating upgrade from BB+ to BBB- is an acknowledgement of the improved fundamentals of the economy. According to S&P, gradual reforms and consistent monetary and fiscal policy stances have sustained macroeconomic stability and India's huge foreign-exchange reserves provide a buffer against changes in investor confidence.

Although the rating upgrade should attract more overseas funds into the economy and enable corporates to raise funds at better terms, it is largely seen as a (long overdue) affirmation of what has already been factored in by global investors. The bullishness on the Indian economy has been attracting large capital inflows in the equity market pushing the market to record highs. Hence it may not have a dramatic effect on the level of capital inflows.

The information on which this is based has been known and factored in, still the rating upgrade lends credibility to the continuance of the India story. Now that all three major rating agencies S&P, Moody’s and Fitch have an investment grade rating on India, more long-term and stable money such as pension funds can invest in Indian markets with greater confidence. Many such funds have the mandate to invest only in investment grade papers. On the other hand, medium-sized companies will benefit from the improved rating and they will be able to borrow abroad at lower rates (bigger companies already enjoy good pricing power in respect of their global bond issuances).