Standard & Poor's has revised the outlook on India's 'BB' long-term foreign currency rating from negative to stable, reflecting the improving external finances, but retained the negative outlook on the country's 'BB+' long-term local currency rating due to government's difficulty in addressing its fiscal problems and structural reforms.
"Rapidly increasing external liquidity, sustained by growing foreign exchange reserves (exceeding 700 per cent of short-term debt), and modest debt service payments sparked the revision in the foreign currency outlook," an S&P release said in Mumbai on Tuesday, quoting credit analyst Takahira Ogawa, director in the Asia-Pacific Sovereign Ratings Group.
Both foreign and local currency short-term ratings on the sovereign were affirmed at 'B'.
"The outlook on India's local currency ratings could be revised to stable if the government manages to reverse its fiscal trajectory by reducing the deficit and accelerating structural reform," he said, adding that this would also improve prospects for the foreign currency rating.
On the other hand, if deficits remain large and debt continues to rise, or if the government fails to stimulate economic growth through deeper structural reform, the local currency rating could become unsustainable, Ogawa added.
This, in turn, could negatively affect the outlook on the foreign currency ratings, he added.
Foreign exchange reserves should equal about 490 per cent of India's gross external financing gap (current account deficit plus amortisation and short-term debt) in 2003 compared with 90 per cent or so in similarly rated countries.
This is a major supporting factor for the sovereign ratings on India apart from its stable and good economic prospects, which was another factor supporting the sovereign ratings, he added.
Ogawa said India is expected to achieve a 5-6 per cent trend rate of GDP growth in the medium term, which should help cushion the impact of its high fiscal deficit and restrain the rise in the government's heavy debt burden.
