India's Soverign Rating

Indian stock market has been showing signs of weakness for the past 10 days and the Supreme Court verdict on the 24^th September regarding cancellation of coal blocks came as a major dampener. The blessing in disguise was the upgrade of India’s sovereign outlook by the global rating agency Standard & Poor from Negative to stable citing improved political setting conducive for reforms boosting the country’s potential growth prospect and improved fiscal prudence. Industry experts believe that this move would considerably improve investor confidence and enhance company’s access to international funds.

Markets reacted jubilantly to the news and NIFTY jumped by 57 Points closing the week at 7960, lower than the psychological level of 8000. INR surged to RS.61.11 to the US dollar against the previous close of RS. 61.34.

Sovereign credit ratings are an assessment of the creditworthiness of a Government’s ability and willingness to make timely servicing of principal and the interest of its debt. Rating is an estimate of a potential occurrence of default but do not address the default risk of other issuers of the same country. Typically, ratings of foreign currency denominated debt are lower than those of the domestic currency debt as the former takes into account sovereign transfer risk and also puts pressure on the sovereign to secure sufficient FX reserves. The sovereign debt, unlike a corporate debt is characterized by the absence of bankruptcy code and thus in the event of default, the lender does not have access to the obligor’s asset. Rating takes into account factors such as Political risk (Institutional & governance effectiveness), External liquidity and international position, Fiscal & Debt burden and monetary flexibility.

India’s external debt to Gross Domestic Product (GDP) is one of the lowest at 23% ($440 billion- March ending 2014) compared to most of the developed and developing nations. The increase in external debt was primarily due to sharp rise in Non Resident Indian (NRI) deposits mobilized last year during September to November under the RBI swap scheme to shore up Forex reserves.

Our House Hold savings at 39% of the GDP is one of the highest in the world.  Despite a sharp increase in the Government’s borrowing year on year, (4 Lakh crore in FY 2012 to 6 Lakh crore in FY 15), the ability to comfortably fund was due to high house hold savings. India has 4 times the solvency. One of the Goldman Sachs report suggests that the domestic savings of India would rise to $800 billion by 2010, translating to 150% of the bank deposits. This is one of the reasons why India could de couple itself from other major economies during the 2008-9 global financial meltdowns.

India has already overtaken Japan to become the world’s third largest economy in purchasing power parity terms. China is already facing increasing pressure to hold onto its FDI & GDP growth. Manpower cost in China is becoming considerably more expensive and the demographics pointing towards losing labor force over the coming years. India has a far more favorable demographics adding to its pool of available workers.

Our growth in FDI was three times over china for the previous year and investment trends are now moving away from China into other emerging ASIAN countries and India is well poised to become the manufacturing hub of the world.

Happy India Investing!

Disclaimer: Views are personal. No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.