MUMBAI: The sovereign rating upgrade to BBB from BBB- with stable outlook, which comes after a long 18-year gap, will make India an attractive investment destination apart from bringing down the cost of borrowings for both the government and corporates, according to analysts.
As expected, the bond yields eased following the news. The 10-year benchmark bond yield eased to 6.4052% at close from 6.4742% at open.
The rupee, which has been under pressure for long, gained after the upgrade, recouping from a low earlier in the day. The currency closed 11 paise higher at 87.55 against the greenback after opening at 87.67. The rupee has lost 2.4% so far this financial year.
However, the stock market ignored the development with a see-saw trade and ended the day marginally higher with the Sensex adding 0.07% and the Nifty adding 0.05%.
According to Soumyakanti Ghosh, the chief economic advisor at State Bank of India, the rating agencies did not capture the country’s fundamentals for almost a decade. The current rating action by S&P reaffirms the position that India's rating ought to have been on the higher side.
Ghosh said the current rating upgrade “hinges on three fundamental observations — credible fiscal consolidation, strong external position and well anchored inflationary expectations, also an acknowledgement that quality of government spending has improved in the past five to six years."
According to Radhika Rao, the senior economist at the Singaporean lender DBS Bank, the S&P upgrade brings the country on par with Indonesia and Mexico.
“The positive impetus on the back of this upgrade will help lower the credit premium on the sovereign’s debt as well as further ease corporates’ offshore borrowing costs,” Rao said.
"The upgrade is driven by improvement in the economy’s macro backdrop, including material progress towards fiscal consolidation goals. With this year’s budget focused on aligning deficits with overall debt levels, we expect cumulative deficit and debt levels to come down in the coming years, aided by healthy growth momentum as well as consolidation," she said further.
DK Srivastava, chief policy advisor at EY India, attributed the rating upgrade to the country maintaining a robust growth performance since the pandemic, outshining all other major global economies, while maintaining a sustained thrust towards fiscal consolidation after its fiscal deficit had peaked in the Covid year of FY21.
“This upgrade makes India an attractive investment destination apart from tangibly reducing international borrowing costs for corporates,” he said.
Anish Shah, Mahindra group chief executive, has said the rating upgrade is a strong vote of confidence in the country’s robust economic fundamentals, disciplined fiscal consolidation, and sustained reform momentum.
“The upgrade will further boost global investor confidence, attract fresh capital, and accelerate the nation’s transformation,” Shah said.
According to Sujan Hajra, chief economist at Anand Rathi Group, any seasoned India observer will tell you that the country of today bears little resemblance to the India of the early 1990s. Yet in the eyes of the global credit rating agencies, such as S&P, the story has barely moved. For more than three decades, India languished at the lowest rung of investment-grade sovereign credit rating.
With this upgrade, many corporates can raise funds internationally at yields well below those faced by peers in countries with similar sovereign ratings, he said.
“Though the upgrade is a welcome development, it is also, by any reasonable measure, too little and too late. What market participants and India-watchers have long recognised is only now being acknowledged by the rating agencies. The reality is that our economic and financial dynamism has far outpaced its perceived credit risk,” Hajra said.
But he does not see anything for investors from this upgrade saying it changes little. "The positive trajectory of our equities and other asset classes is likely to continue, propelled by the same structural strengths that have underpinned their strong performance for years, irrespective of the verdicts handed down by credit rating agencies," he added.
Vishal Goenka, cofounder of IndiaBonds.com, said the upgrade will encourage more foreign and FPI inflows into the government bond markets as this gives better risk-adjusted returns, with yields falling in the short term.