Foreign brokerages expect upgrade in India's credit outlook

Mumbai: There is a 'compelling' case for an upgrade of India's sovereign rating outlook, two brokerages said on Thursday that with one of them anticipating the revision in 2017. Bank of America Merrill Lynch on Thursday said "worst is over" for India and credit rating agencies are likely to upgrade their outlook for the country sooner rather than later.

British brokerage Barclays said that it expects India's foreign currency ratings to move to the 'BBB' level from the current 'BBB-' by 2017. "Such a move is likely to occur against a backdrop of sustained higher growth, relatively stable inflation and continued fiscal consolidation," it said in a note.

Barclays said that the key risk to the rating will be oil price hike, reduction in the political will to carry out the necessary reforms and domestic security risks. BofA-ML said meanwhile that "with Moody's downgrading their Brazil outlook last night, key emerging market peers are seeing downgrades", but added that "we expect rating agencies to upgrade their outlook for India. We see three compelling reasons to expect at least an outlook upgrade for India".

It said that the prime drivers for an upgrade in the outlook would be: growth is bottoming out and there is an expected rebound to the 8 per cent level by 2018; inflation is peaking and expected to reduce, and a reduction in the fiscal as well as current account deficits.

At least two of the international credit rating agencies, led by S&P, have expressed concerns about country's sovereign rating since 2012. They raised issues of sagging growth, high inflation, high fiscal deficit and also a sense of 'policy paralysis' which had its roots in a perceived lack of decision making by the previous UPA regime.

S&P has a 'BBB-' rating with a negative outlook on the country. 'BBB-' is the lowest investment grade and a downgrade would mean pushing the country's sovereign rating to junk status, making overseas borrowings by corporates costlier.

BofA-ML said: "We thought the S&P downgrade of the BBB-outlook to negative from stable in April 2012 unwarranted." The government has been meeting representatives of the rating agencies for over a month, trying to impress upon them positives in the economy. Moody's has assigned 'Baa3' rating on India, with a stable outlook, which suggests a possibility of an upgrade.

Fitch has affirmed India's long-term foreign and local currency issuer default rating at 'BBB-' with stable outlook. Finance Secretary Arvind Mayaram had met representatives of the Moody's earlier this week.

"We presented our case. The budget has strong growth impulses and response of the economy is positive. They have concerns about fiscal deficit. We explained that we will be able to maintain target," he told reporters after the meeting. The government has affirmed a commitment to stick to the 4.1 per cent fiscal deficit target for the current fiscal and bring it down gradually to 3 per cent by FY17.