India's Economic Outlook Upgraded by S&P: What It Means for Investors and Companies

In bald terms, a favourable sovereign ratings action lowers the cost of capital a company would incur while raising money from the global debt market.

Ratings agencies essentially assess the balance sheet of a company to see how much debt they can reasonable raise without stress. The agencies do not assess the value of the shares of a company, which is why it is sometimes tricky to correspond the assessment on the leverage of a company with that of its equity. 

But in doing so, the world’s largest rating agency, S&P always keeps a hawk eye on the environment in which the company operates. Within this environment, the status of the economy of a country matters a lot.

S&P therefore maintains a global ratings department which does country assessments. Those assessments answer the question, how safe is a dollar put into the debt of a company in a particular country. India’s rating at BBB- is therefore the ceiling for the ratings a company can obtain from S&P or other rating agencies like Moody’s and Fitch which also employ the same principle. 

If a country has a higher rating in the world market, that is an invitation card for investors globally to put money in the companies based out of that country. The better the grade, the lower the risk. 

Countries across the world therefore put a lot of emphasis on how these ratings agencies assess them. The highest rating AAA+ for instance denotes the safest possible operating environment for a company. Even the USA does not enjoy this grade anymore as its debt has ballooned. Only the multilateral agencies like the World Bank have this grade now. 

India, is at the lowest investment grade as per the S&P chart. This is not bad. It means the S&P is confident that India is a market worth investing in. But the Indian government's mandarins are of the opinion that the country' grade should be higher. 

Why is this significant for companies? As we noted, for any India-based company, no matter how well it manages its finance, the best rating is circumscribed by the ratings for India. True enough, by Wednesday evening (India time) S&P had revised upward the ratings of six Indian banks, plus state-owned power companies, ONGC, NTPC and PowerGrid, potentially offering them larger space to borrow more at the same or cheaper cost. 

What has also caught the attention of the investors is the sentence that the agency is also considering an upgrade of the rating. The press release issued by S&P makes no bones about this. “Along with cautious fiscal and monetary policy that diminishes the government's elevated debt and interest burden while bolstering economic resilience, could lead to a higher rating over the next 24 months”. 

With election results less than a week away, S&P has also noted “Regardless of the election outcome, we expect broad continuity in economic reforms and fiscal policies". This is a strong tick mark for the economy and among the triggers “that could lead to an eventual upgrade”. 

This perspective colours its evaluation of the banks it rates in India. Again note, S&P or any ratings agency does not have any right to rate a company unless the latter asks and pays a fee for it. On the six Indian banks, S&P rates, it says “India's good economic growth prospects will continue to support the asset quality of banks. Supportive structural and cyclical factors provide added benefits. We project the banking sector's weak loans (including standard restructured advances) will decline to about 3.0% of gross loans by March 31, 2025, from our estimate of 3.5 per cent as of March 31, 2024.

"This is on the back of healthy corporate balance sheets, tighter underwriting standards, and improved risk-management practices. We believe underwriting standards for retail loans in India are healthy, and delinquencies in this segment remain manageable. However, unsecured personal loans have grown rapidly and could contribute to incremental non-performing loans”.

Notice how the evaluation scorecard runs from the bank to the larger economy and back. This is why the card says “S&P Global Ratings' risk adjusted capital for the banking sector will also benefit from lower risk weights in case the sovereign is upgraded”. Or, if the Indian government continues to follow a prudent path of fiscal conservatism, inflation control and rein on current account deficit, the banks will benefit.

They shall be able to raise more capital at lower cost from the domestic and foreign markets. In the power sector, NTPC has a fantastic low debt to equity ratio of below one. But for S&P the rating action is just one line “The positive rating outlook on NTPC reflects our outlook on the sovereign credit rating on India”. Country risks matter a lot. 

(The author is an economist and Consulting Editor at Business Standard. Views expressed are personal)