S&P upgrades foreign currency rating

Our Banking Bureau
03 February 2005

The upgrade on the foreign currency reflects India's improved external position and growth prospects, the agency said in a press release.

India's external position, stronger than all other sovereigns in `BB' rating category, is resilient and likely to be maintained in the coming years, the agency noted. The country's foreign exchange reserves mitigate the risk of volatility in external and domestic confidence. "The strong growth in export earnings, particularly from the service and manufacturing sectors, as well as non-debt foreign capital inflows should alleviate the impact of rising imports. India's external debt and debt service burden is expected to fall in the years ahead," the agency said.

S&P is the third international credit rating agency to upgrade India in the past year. Moody's Investors Service 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 `BB+' from `BB'.

S&P said that India's economic prospects are good with GDP growth likely to hover at 6.5 - 7 per cent in the medium term. The service sector is dynamic, while the industrial sector is benefiting from gradual deregulation, trade liberalisation and modest improvements in infrastructure. The business environment is likely to improve in the coming years, sustaining private investment and economic growth. The banking system has also improved with reforms; it can now support a higher economic growth while reducing the contingent risk on the government, the release said.

S&P also raised its long-term foreign currency rating on the Export-Import Bank of India to `BB+', in line with the upgrade on the sovereign credit rating.

The stable outlook on the ratings reflect the expectations that the pace of the fiscal correction, further improvements in the external sector and lifting India's potential growth rate substantially will be gradual.