Hopes of rating upgrade set to strengthen rupee

Expectations of a sovereign rating upgrade are set to see the rupee rise.

Currently, Standard & Poor’s has a ‘BBB’ rating on India, the lowest in the investment grade, with a negative outlook. An upgrade will help India attract more foreign flows and, therefore, strengthen the rupee.

According to a communication by S&P, the five key factors on which its sovereign credit analysis is based are institutional and government effectiveness and security risks; economic structure and growth prospects; external liquidity and international investment position; fiscal performance and flexibility; and debt burden and monetary flexibility.

“Most leading indicators are showing all-round improvement. Also, the government is committed to fiscal consolidation.

"Compared to other emerging market economies, our house is more in order. Foreign exchange reserves have gone up and the government securities market is being reformed,” said Rupa Rege Nitsure, chief economist and general manager, Bank of Baroda.

Though Consumer Price Index-based inflation rose to 7.96 per cent in July from 7.46 per cent in June, it is felt this will stabilise in the months ahead, as the Reserve Bank of India is committed to reducing inflation to eight per cent by January 2015 and six per cent by January 2016.

Growth in India’s gross domestic product for the June quarter of 2013-14, as well as for the entire 2014-15, was 4.7 per cent.

RBI believes for this financial year, growth will stand at five-six per cent.

A rating upgrade, coupled with a pick-up in growth and slowing inflation, is set to boost the rupee.

“Initially, the outlook might be changed from negative to stable. If that happens, the rupee could rally to 60 a dollar. In the interest of exporters, RBI might not want the rupee to appreciate beyond 60/dollar; it might remain at 60-61/dollar for quite some time,” said Naveen Raghuvanshi, senior dealer (forex-treasury and correspondent banking), DCB Bank.

On Thursday, the rupee closed at 60.52 a dollar, compared with its previous close of 60.45.

Some experts believe due to a rating upgrade the rupee might appreciate beyond 60 a dollar for a brief period.

India is in a comfortable position on the foreign exchange reserves front, too. Latest data show RBI’s foreign exchange reserves rose by $43.3 million to $319.39 billion during the week ended August 15.

“Geopolitical issues and economic struggles in developed economies have kept off-shore appetite on India assets firm, chasing the long-term growth story. Given the combined tailwind from domestic and external cues, importers’ fears are diluted, while exporters are seen in a hurry to absorb any short-term weakness in the rupee,” said Moses Harding, group chief executive officer (liability and treasury management) and chief economist, Srei Infrastructure Finance.