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Global rating agency Standard & Poor's (S&P) recently stated that it does not expect to upgrade India's sovereign debt rating anytime soon. Currently S&P rates India at 'BBB-Minus' with a 'stable' outlook. It is the lowest investment grade as per their rating norm.
Sovereign debt is bonds issued by the Government of India (GOI) in foreign currency or local currency to finance the country's growth. In one of the recent issue of The 5 Minute WrapUp we have explained India's positioning in the sovereign debt market and its consequences on the economy.
A lower rating indicates the country's inability to service the debt as and when it is due. A downgrade in ratings may also lead to an outflow of money from Foreign Institutional Investor (FII) and Foreign Direct Investment (FDI).
A 'BBB-Minus' rating indicates that the country has adequate capacity to meet its financial commitments. However the rating also states that certain adverse economic conditions persists which can lead to the weakened capacity of the obligor to meet its financial commitments.
S&P's prime concern is the slow pace and absence of quality reforms for its reluctance to upgrade the credit ratings. Over the past 12 months, important legislations such as Land Acquisition Act, Goods and Service Tax Act, Labour Act have failed to get passed in the Parliament due to lack of consensus. GST was to be made effective from the next financial year. However the same seems to be impossible now.
Further, government slowed the pace of fiscal consolidation. Fiscal consolidation is a policy effort by the government to bring down the fiscal deficit and public debt. It includes efforts to raise revenues and bring down wasteful expenditure such as subsidies. Finance Minister in his budget speech delayed the deadline for cutting the fiscal deficit to 3% of GDP by one year to 2017-18. Considering crude prices to be at low levels, rating agency stated that the quality of fiscal consolidation was not as good as it could have been.
While Indian financial markets are yet to face problems in relation to poor credit ratings, other emerging economies are not insulted. Recently Brazil was downgraded to 'junk' rating by S&P. The move took a hit on the financial markets in Brazil.
India recently acquired the status as the world's fastest growing economy. In order to retain the status, government will have to bring significant reforms in order to boost the economy. An upgrade in our credit rating could also ease cost of funds overseas and boost the FII and FDI inflows.
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