India`s Positive Rating Outlook, April 13, 2015

FIMPACT Newsletter No. 80 (dated 13th April 2015). Contact us at [email protected]
In the previous newsletter dated April 06, 2015, we gave an overview of the Alternative Investment Fund industry
in India based on data provided by India’s capital market regulatory, the Securities and Exchange Board of India.
In this newsletter we highlight the affirmation of BBB+ rating by ARC ratings and Baa3 rating by Moody’s Investor
Service to Government of India’s sovereign debt.
On March 27, 2015, ARC Ratings affirmed its sovereign rating as BBB+ for foreign currency issuances and A- for
th
local currency issuances. On 9 April 2015, global ratings agency - Moody’s Investor Service, revised the outlook
on India’s sovereign rating from ‘stable’ to ‘positive’ while retaining the rating at Baa3. Also it affirmed the P-3
rating for short-term local currency issuances. According to Moody’s, the revision in rating outlook to positive from
stable is based on its view of increasing probability that actions by policy makers will enhance the country's
economic strength and, in turn, the sovereign's financial strength over coming years.
Also Moody’s expects these structural advantages, supported by relatively benign global commodity prices and
liquidity conditions, will keep India's growth higher than that of its peers over the rating horizon. India’s economy
is estimated to have grown 7.4 per cent in 2014-15 as against 6.9 per cent in 2013-14. Further, the foreign
exchange reserves (as on April 03, 2015) stood at USD 343bn, an increase of 10.6% as compared to same date
previous year. This increase in reserves accompanied with the appreciation in the exchange rate against US
dollar provides strong support for Moody’s revised outlook on India’s rating.
Foreign Exchange Reserves (USD bn)
INR-USD Exchange Rate (INR per USD)
350
65
340
64
330
63
320
62
310
Source: RBI (Last Data Point April 03, 2015)
Feb-15
Mar-15
Jan-15
Dec-14
Oct-14
Nov-14
Sep-14
Jul-14
Aug-14
Jun-14
May-14
Apr-14
Mar-14
Jan-14
Dec-13
Apr 15
Jan 15
Oct 14
Jul 14
Apr 14
Jan 14
Oct 13
Jul 13
Jan 13
Apr 13
58
Oct 12
59
270
Jul 12
280
Jan 12
60
Apr 12
290
Feb-14
61
300
Source: RBI (Last Date Point is for April 10, 2015)
Further, from an external balance perspective, inflows from foreign direct investments in January 2015 have
increased to USD 4.6bn, bettering the recent monthly high of USD 4.4bn received in September 2013. However,
portfolio investments stood at USD 3.45bn in March 2015 as compared to USD 4.09bn in February 2015. FPI
flows into debt have marginally decreased to USD 1.4bn in March 2015 from USD 2.2bn in February 2015, while
FII flows into equity have increased to USD 2.0bn in March 2015 from USD 1.9bn in February 2015.
FIMPACT Newsletter No. 80 (dated 13th April 2015). Contact us at [email protected]
FII Flows into India (net, USD bn)
FDI Equity Flows into India (USD bn)
6.0
5.6
5.3 5.65.1
4.2
4.1
3.73.6
3.6
3.5
2.8
2.22.1
2.0
4.7
1.8
1.2
0.40.4
4.6
4.4
3.6
3.6
0.3
0.1
3.5
2.7 2.7
2.3 2.1
1.5 1.4
Aug-13
-2.6
-3.0
1.7 1.5
Jun-13
2.1
1.7
1.7
1.3
2.3
1.9
1.6
1.3
1.1
Source: NSDL (Last Date Point April 10, 2015)
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
Apr-13
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
Aug-13
Jun-13
Apr-13
-7.4
Source: DIPP
However, recurrent inflationary pressures, occasional balance of payments pressures have contributed to periods
of volatility in growth, and could expose India to external and financial shocks. Three other premier rating
agencies — Standard & Poor’s (S&P), Fitch Ratings, and ARC Ratings — have also rated India’s sovereign debt
at similar levels. However, all the three institutions have a stable outlook on India’s ratings. On April 9, 2015, Fitch
Ratings retained its rating as BBB-, as well as outlook is stable.
Sovereign Ratings by Various Agencies:-
Rating
Meaning
Moody
Standard & Poor’s
Fitch Ratings
ARC Ratings
Baa3
BBB-
BBB-
Medium-grade and
subject to moderate
credit risk. May possess
certain speculative
characteristics.
Provides adequate protection.
However, adverse economic
conditions are more likely to
lead to a weakened capacity to
meet its financial
commitment.
Good credit quality
and expectations of
default risk are
currently low.
BBB+
Exhibit adequate capacity to
meet its financial
commitments. However,
adverse economic conditions
are more likely to lead to a
weakened capacity to meet
its financial commitment.
Outlook
Positive*
Stable**
Stable***
Stable#
*Revised from Stable on April 9, 2015; **Revised from negative on Sep 26, 2014; ***Reaffirms rating & outlook on April 9,2015;
#Reaffirms rating on March 27, 2015
Source - Respective Rating Agencies
FIMPACT Newsletter No. 80 (dated 13th April 2015). Contact us at [email protected]
Moreover, Moody’s points out that the Indian banking system's asset quality is relatively weak which poses
sovereign credit risks because of the banking sector's role in financing growth. Also a high fiscal deficit of 7.2% of
GDP and increase in external debt by 8.4% to USD 461.9bn in December 2014 from the level in December 2013
are some of the factors considered S&P and Fitch Ratings while reaffirming their ratings on India. As per Fitch
Ratings, factors like fiscal consolidation and improved business environment from implemented reforms and
structurally lower inflation levels, which would support higher investment and real GDP growth could lead to
positive rating. And S&P could raise the rating if the economy reverts to a real per capita GDP trend growth of
5.5% per year and fiscal, external, or inflation metrics improve. ARC Ratings highlights banking system’s weak
asset quality, fragile financial sector and highly indebted government sector as constraints for rating upgrade.
Gross NPA (% of Gross Advances)
External Debt (% of GDP)
Short Term
12.7
11.4
10.4
Long Term
5.1%
5.2%
3.9%
8.8
3.7%
3.7%
4.7%
4.5%
4.4%
3.7%
7.2
Source: RBI (* Average of four quarters in FY15)
Jun-14
Mar-14
Dec-13
2012-13
2011-12
18.7% 18.7%
16.6% 18.2%
14.5% 14.5% 16.1%
2010-11
16.4%
2009-10
Q1-16
14.3%
2008-09
4.3
2007-08
3.8 4.2
FY14
FY13
FY12
2.9 3.2
FY11
FY10
FY09
FY08
2.5 2.3 2.3 2.4 2.4
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
3.3
FY15*
5.2
Source: Ministry of Finance & RBI
The affirmation of BBB+ rating by ARC ratings and Baa3 rating by Moody’s Investor Service to Government of
India’s sovereign debt highlights the improving economic and investment scenario in India. Contingent on certain
macro-economic indicators showing continued positive trends, the sovereign rating outlook for India could
improve further in the coming years.
We hope you found the above illustration useful. We welcome your feedback and you can write to us at
[email protected]
FIMPACT Newsletter No. 80 (dated 13th April 2015). Contact us at [email protected]