S&P, as expected, did not upgrade India from BBB-, but at the same time forecast a robust economic growth over the next two years. S&P and Moody's are on the same page but different ratings on India. Here's what happened and why
It was a shot in the arm for Prime Minister Narendra Modi when nearly after 14 years Moody’s upgraded India’s credit rating to Baa2 from the lowest investment grade of Baa3. But its timing was not only questioned and called ‘premature’, with analysts speculating that the other two — S&P and Fitch — of the ‘Big Three credit rating agencies’ will not follow the suit. S&P, as expected, did not upgrade India from BBB-. Albeit at the same time forecast a robust economic growth over the next two years.
“A reversal in low oil prices have raised risks to the economy’s fiscal, inflation and current account dynamics. We don’t think the other two global rating agencies – Fitch and S&P– will follow-up in a hurry, based on their cautious rhetoric, mainly drawing attention to the weak fiscal (state and central government),” DBS Group had said in a note last week after Moody’s upgrade.
Moody’s justified its upgrade by saying that even as some reforms remain at the design stage, those implemented to date will support India’s strong growth potential and help improve global competitiveness to enhance the economy’s shock absorption capacity. S&P, too, welcomed recent actions such as the GST and the massive Rs 2.11 lakh crore bank recapitalisation plan. The reading of both Moody’s and S&P come on the same page: The Narendra Modi government is capable of taking tough decisions, which have had short-term disruptions but are going to have long-term benefits.
Moody’s, anticipating the long-term benefits, upgraded India’s rating, S&P chose the wait and watch policy — which is exactly what analysts have been saying given the “botched” demonetisation program and the imposition the GST that have left the “economy—especially the lowest rungs—writhing.”
Interestingly, S&P did not show much apprehension about the rising crude oil prices; rather lauded India for maintaining record foreign exchange reserves to cover for international shocks. Neither did Moody’s, who said, with the rise in Foreign Direct Investment and Forex, India’s external vulnerability is expected to be low. Low income and fiscal slippage were the concerns raised by both.
India has long frowned at the rating agencies for not upgrading the country, and rather favouring China. India has also long lobbied for a rating upgrade, which hasn’t nudged S&P yet. On this “glass-half-full-and-half-empty” situation, Finance Ministry’s reaction is worth noting. Arun Jaitley welcomed the Moody’s upgrade saying, it was a “belated recognition” of positive steps taken by the government, while on S&P rating the Finance Ministry said, it was “cautious”.
Historically, S&P has maintained a conservative approach for rating upgrade as compared to Moody’s, this is the defence of the government, but with S&P keeping on hold India’s rating, analysts stand vindicated. Nomura had said that Moody’s rating upgrade was a welcome surprise but their “bias was that the rating agency will likely wait for the government’s fiscal position to actually improve before making any changes.”
Now all eyes are on Fitch Ratings, which also currently rates India at “BBB-minus” with a “stable” outlook, in line with S&P’s ratings.