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Revealed
India's Third Giant Leap

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Is a rating upgrade on the cards?
Thu, 18 Apr Pre-Open

It was not so long ago when several global rating agencies had given negative outlook on India. Some had even threatened a downgrade to junk rating! A combination of factors viz; widening fiscal deficits, slowing growth and persistently high inflation plagued the country's sovereign rating outlook.

However the recent correction in global commodity prices, seems to be ray of hope in this tough time.

India's current account deficit had widened to 6.7% of GDP for the quarter ended December 2012. This was largely attributable to the rise in import bill for of oil and gold. These outpaced exports of goods and services by a huge margin. The exports were also impacted as the rupee dollar rates made Indian goods more expensive and less competitive in the global markets, thus resulting in bloated deficit.

With the recent fall in commodity prices, the import bill for gold and crude oil is expected to shrink, thus narrowing the current account deficit (CAD) gap. Plus fall in inflation may also prompt the Reserve Bank of India (RBI) to cut interest rates. This will not only increase demand in Indian markets but also stimulate investments and GDP growth.

These signs of revival, if sustained, should offer some comfort to global rating agencies. We would therefore wait and watch if the downtrend in commodity prices brings in a possibility of rating upgrade for India.

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