S&P raises India's rating to investment grade

Global rating agency Standard & Poor's has raised India's sovereign credit rating to investment grade, citing the country's strong economic outlook, its rising foreign exchange reserves and the improved regulation of its stock and bond markets.

Gradual reforms and consistent monetary and fiscal policy stances have sustained macroeconomic stability and India's huge foreign-exchange reserves provide a buffer against changes in investor confidence, according to the agency. The foreign exchange reserves, which totaled about US$176 billion at the end of 2006, are more than 16 times of India's outstanding short-term debt.

India's GDP has clocked an average of over 8 percent growth in the past three years and the economy is expected to grow a record 9 percent in the current fiscal year ending March 2007. The rating upgrade from BB+, the highest junk rating, to BBB-, the lowest investment grade rating, will help improve India’s credit standing and reduce the borrowing costs in the global market.

S&P said India's fiscal position has improved and the country has a "well-functioning" bond market, which provides long-term financing of government deficits. The central government's budget deficit for the current year seems­ to be back on track to meet its target of 3.8 per cent of GDP due to strong revenue collection. The secular decline in general government deficits in the medium term is likely to continue due to tax reform and improved administrations and implementation of fiscal responsibility laws across more states, currently enacted by 23 out of 29 states, according to the rating agency’s assessment.

Further rating improvements will, however, depend on sustained prudent fiscal policy that leads to a decline in government debt and interest burden, and further reforms that lift the country's growth prospects and income levels.