Wall Street Journal
Thursday, February 03, 2005

S&P Lifts India's Debt Rating, Citing Strong Growth Prospects

By ANIL VARMA

BOMBAY, India -- Standard & Poor's Ratings Services raised India's long-term foreign-currency debt rating, a move that should boost foreign investment and help the country get more competitive pricing on its future borrowings.

The international credit-rating agency upgraded India's foreign-currency debt by one notch to double-B-plus, and affirmed its double-B-plus long-term local currency and short-term ratings. It cited the country's improved external position -- particularly its high foreign-exchange reserves -- and strong growth prospects as reasons for the upgrade.

"The current foreign-currency rating leaves India only one notch below the investment-grade rating of triple-B-minus," said Ping Chew, Director of Sovereign and International Public Finance Group at Standard & Poor's.

S&P is the third international credit-rating agency to upgrade India in roughly a year. Moody's Investors Service Inc. upgraded India's foreign-currency debt to Baa3, or investment grade, from Ba1 in January 2004. Fitch Ratings also upgraded India's foreign debt in January 2004 to double-B-plus from double-B. All three rating agencies have stable outlooks on their ratings for India.

Analysts said they believe the S&P upgrade should help sustain the trend of strong capital inflows that India has witnessed in recent months -- stock-related capital inflows alone topped $9 billion in 2004, a record.

"Since this is a vote of confidence on India's economic fundamentals, foreign fund inflows -- both foreign-direct investment and portfolio investment -- will continue," said S.P. Prabhu, an analyst at Bombay-based IDBI Capital Markets.

S&P's move surprised local financial markets -- particularly the rupee, which rallied to a one-month high against the U.S. dollar. The dollar fell to 43.41 rupiah yesterday -- a level last tested on Jan. 1. The dollar settled at 43.70 rupiah Tuesday.

Government-bond prices rose on hopes that increased capital inflows in the wake of the upgrade should boost liquidity in the banking system. The price of the actively traded 7.38% paper, due 2015, rose to 105.25 rupiah from 104.94 rupiah Tuesday. Its yield eased to 6.68% from 6.71%.

The stock-market reaction was relatively muted. After rising mildly soon after S&P announced the upgrade, shares quickly shed those gains to end slightly down on broad-based profit-taking. The Bombay Sensitive Index edged down 22.41 points to 6530.06 yesterday.

S&P highlighted India's significantly improved external position as the key driver for the ratings upgrade. "India's external balance sheet has strengthened markedly, due to reserves accumulation and prudent debt management, which should lower the external liquidity risk from its fiscal vulnerability," Mr. Chew said.

Foreign-exchange reserves totaled $129.43 billion on Jan. 21, up nearly $24 billion from a year earlier. Reserves now exceed the country's gross external debt, which stood at $113.6 billion at the end of September 2004. Economists consider this a significant improvement from 1991 -- the year the country began its economic overhauls -- when reserves measured a mere 7% of external debt.

India's economic prospects remain strong, with annual growth in gross domestic product likely to hover at 6.5%-7% in the medium term, supported by a dynamic service sector and gradual industrial and trade liberalization, the ratings agency said.

"However, the country's weak fiscal situation continues to be a serious economic concern, with the ratio of general government debt to GDP now hovering above 80%," S&P said.