Strengthening of banks key for sovereign rating upgrade: Atsi sheth

By: |
Published: May 14, 2015 12:18:27 AM

Calling the banking sector the weakest link, senior vice-president – Sovereign risk group at Moody’s Investors Service Atsi Sheth...

Calling the banking sector the weakest link, senior vice-president – Sovereign risk group at Moody’s Investors Service Atsi Sheth said the key to a sovereign rating upgrade for India hinges on strengthening of its banks. The global rating agency had raised the outlook on the sovereign rating to positive from stable in April. In an interview with Aparna Iyer, Sheth said a combination of rise in growth rate, moderating inflation and current account deficit could lead to a rating upgrade. Excerpts:

What will make you upgrade the rating of India?

What we would look at is the growth performance and the factors that have driven that performance. Our expectation is that it would be subdued and is likely to remain around 7.5%. But if it’s lower, we will see what drove it lower. We would also see the trend in industrial output. But more important is the competitiveness in the terms of current account. An acceleration in growth with a levelling off in inflation and current account would lead us to take a step up in rating. But what is key is what happens to the banking sector. Whether banks are being strengthened, that is key to a rating upgrade.

If the banking sector is the weakest link, what measures do you want before an upgrade?

RBI has already done several things that are credit positive such as increasing capital requirements. The government has calibrated recapitalisation by performance of banks. Banks have themselves been trying to clean up their bad assets. They are also not rushing to lend, which is a good thing. What we are watching is how are these efforts showing up in NPLs. Bad loans will rise but whether the rate of the rise is slower than before is what we will watch.

How do you view the risk to unhedged exposure of corporates that are already leveraged?

We are looking at the ratio of external borrowings to reserves, borrowings to export earnings and borrowings to profitability. The first two are systemic risks. The last one is a micro-risk and quite low at the moment. We think systemically, today there is no big risk but it could become a risk going ahead.

The presence of RBI is making corporates keep unhedged exposures…

Buying dollars weakens the currency. Since 2014, if we look at India’s exchange rate, it appreciated a lot between August 2013 and beginning 2014. And then the rupee weakened again to 64/$ now. Had RBI not intervened, this appreciation would have been sharper, and the consequent fall would have been sharper. We have seen less volatility due to the RBI’s intervention. If the corporates think the RBI would not let the currency depreciate, what can they base this conclusion on? The RBI did let rupee run to 68/$ in 2013.

Much of the reforms are basically steps to get the house in order. How crucial are these reforms from a ratings perspective?

India had a sub-optimal policy environment in the last decade, but even with this, the economy did well. We raised the outlook on rating in 2004. This sub-optimality of the reforms process led to inflation and a big current account deficit widening significantly by the end of that decade. So the reforms that we have in mind are inflation targeting and external accounts and this is happening. Do we need a magic wand? No. What is positive is whether the bills such as Mine get passed in Parliament or is foreign direct investment being allowed in insurance and greater freedom to states.

Do you see the inflation targeting approach helping the sovereign credit profile?

One of the things about having a framework is that now the central bank is bound by it. Over time, markets start expecting the central bank to behave in a certain way and so the volatility reduces. From a policy transparency perspective and from a predictability perspective, an inflation target framework is positive and if the central bank is successful in achieving the target, it is very positive for the sovereign credit profile of India.

For Updates Check Company News; follow us on Facebook and Twitter

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Next Stories
1Indian rupee ends higher by 17 paise vs US dollar on recovery in equities
2Momentive Celebrates 75 Years of Invention
3DuBiotech Welcomes Germany’s B.Braun