Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Indian Stock Market News, Equity Market and Sensex Today in India | Equitymaster
  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

India's Rating Upgrade Unlikely in the Near Future...
Thu, 22 Sep Pre-Open

Circa 2013, India was struggling with a widening current account deficit, high inflation and a slowdown in its GDP growth rates. The currency market reflective of the country's grim situation led to a steep rupee depreciation, this slide made things worse since the rupee depreciating against the dollar meant we had to pay more for imports. A double whammy since we primarily import a majority of our crude requirements which further strained the country's finances. The global rating agencies which had assigned India lowest level of investment grade rating, then threatened to downgrade its ratings a notch down which would have meant a junk bond status for the country. In short, the country would have struggled with its interest burden since borrowing costs would have shot up steeply.

Since then, the intervention of the Reserve Bank of India in the currency markets and some global macro tailwinds in terms of lower crude costs have helped improve the country's fiscal position and stabilise the economy. The present government to its credit also began implementing key reforms which further bolstered the economy. The ratings agency Moody's will now meet the finance ministry officials to understand better the current and future implications of the steps that the government plans to take. While the government would pitch in for a ratings upgrade. Here's why the upgrade does not look likely in the short run, on the monetary policy front, the cementing of monetary policy framework with objective of maintaining moderate inflation is considered a credit positive by the ratings agencies. Further, reforms implemented by the government like the Bankruptcy code, goods and services tax (GST), restoring aka capitalizing public sector banks to help banks with much needed capital in its fight against non-performing loans. All of these measures will not bear immediate fruit. We will be able to see the actual benefits and effectiveness only over the period of time.

Thus while the operational metrics of the country are improving. There are some areas which require government's immediate attention. The weakness in private investments. Private investments play a crucial role in developing the economy. The government is already reeling under a high debt to GDP burden, the ratio of which stands high at 67% currently. The governments' narrow revenue base and a limited fiscal space to offset any future shocks to the economy is a concern. In addition, while it is important to highlight the bad debt problem that the banks currently face, in absence of any long term solution to this problem, will just mean kicking the can further down the road. This will pose an even bigger threat going forward. There is also a need to further ease entries of foreign direct investments which will drive further productivity growth.

We think the focus should not be on what sovereign ratings we can get from these agencies, rather the entire focus of the government must to be on improving things on the ground and a willingness to accept some potentially painful and unpopular short term decisions for the country's long term benefit. The ratings in the long run eventually will recognize and get upgraded to reflect India's true strength and potential.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

Read the latest Market Commentary

Equitymaster requests your view! Post a comment on "India's Rating Upgrade Unlikely in the Near Future...". Click here!


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Jan 17, 2018 01:09 PM