S&P has helped with a 2-year guidance, but it is time to act fast
In a rather surprising move, S&P opted to maintain its BBB- rating guidance for Indian sovereign debt and has also held the stable outlook. A big change was the hint that S&P would most likely hold this rating for at least the next 2 years.
S&P rating – What is special?
Like the other two rating agencies, Fitch and Moody’s, S&P has also kept India’s sovereign rating at BBB-. This is the last of the investment grades and even one notch downgrade below this point will take India into speculative grade. That will have larger implications for cost of funds and also for the appetite for the debt paper of the Indian government and also of Indian companies. S&P has decided to maintain the rating at BBB- in its latest review with stable outlook.
However, the bigger shift is a trajectory on the rating given by S&P for the next two years. In its note, S&P has clearly stated that it does not see prospects of any downgrade in the rating, unless the macro situation deteriorated big-time. According to S&P, resurgence of COVID was likely to push India’s base case GDP growth in FY22 to 9.8%. However, it also projects the worst-case growth at about 8.2%. S&P has clarified that even in the worst case, the sovereign rating would not be impacted. S&P strongly believes that the growth impulses would aid an early recovery from the second round of the pandemic. That justified holding the rating for next 2 years.
Why trajectory is important
The 2-year rating trajectory given by S&P is critical for a number of reasons. Firstly, it gives an assurance to investors in Indian debt paper that, except in very extraordinary situation, debt downgrade is unlikely. This will have positive impact on the cost of funds and ensure better appetite for Indian paper. Secondly, it gives the Indian government and the corporates the necessary leeway to plan their fund-raising programs. Thirdly, this trajectory is an acknowledgement that COVID related economic shocks are a macro phenomenon. Singling out India for the likely implications is unfair. In a way, S&P has been extremely proactive on this front, after the flak that rating agencies have faced in recent times.
Time to put the macros in order
The message for the Finance Ministry is that it now has a window of 2 years to put the economic house in order. There is an urgent need to address two very critical issues. Firstly, fiscal deficit has always been a double edged. Fiscal deficit of 9.6% or 6.8% are acceptable as an exception, not a rule. India needs to crunch its time-table to come back to 3.5% fiscal deficit to next 2 years. The second message is to get the inflation in control. Supply side bottlenecks are very manageable and government has two full years to ensure it can ensure price stability. That is how India can make the best of the 2-year window from S&P!