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On Feb. 2, Standard & Poor's Ratings Services lifted its long-term foreign currency rating on India from BB to BB+ and affirmed its BB+ long-term local currency and short-term ratings. The outlook is stable. The upgrade on the foreign currency -- India now stands one notch below investment grade -- reflects the country's improved external position and growth prospects.
S&P also raised its long-term foreign currency rating on the Export-Import Bank of India by one notch, to BB+, in line with the upgrade on the sovereign credit rating.
STRONG RESERVES. "India's external balance sheet has strengthened markedly, due to reserves accumulation and prudent debt management, which should lower the external liquidity risk from its fiscal vulnerability," says Ping Chew, sovereign credit analyst at S&P.
India's external position, stronger than all other sovereigns in the BB rating category, is resilient and likely to be maintained in the coming years. Its foreign exchange reserves now stand at ratios of more than 20 times its short-term debt and six times its gross financing requirements.
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.
BETTER BANKING. India's economic prospects are stable and good, with growth in the country's gross domestic product likely to hover at 6.5% to 7% in the medium term. The service sector is dynamic, while the industrial sector is benefiting from gradual deregulation, trade liberalization, and modest infrastructure improvements.
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 stable outlook on the ratings reflects the expectation that the pace of fiscal correction and further improvements in the external sector will be gradual.
POTENTIAL RISKS. The principal risks to India are generated by a weak fiscal profile, especially its high deficit and debt, and serious fiscal inflexibility, which is one of the worst among rated sovereigns.
Although the central government has stepped up efforts to rein in the deficit, the consolidated central and state government deficits will amount to 10% of GDP in the near term. This will push the ratio of general government debt to GDP higher, from more than 80% currently. The public sector, especially the electricity sector, is also inefficient. From Standard & Poor's Ratings Services