S&P RATING AND RAJAN - WHAT LIES AHEAD?
By Ruma Dubey
The weekend was indeed very newsy. Whew! Busy actually. There was so much happening – first was the surprise S&P rating revision, then Modi’s visit to USA and his speeches on Saturday and Sunday kept pretty much everyone enthralled. Not to mention the very bold decision of arresting the CM of Tamil Nadu. Looks like the courts are truly on a major ‘swach Bharat’ mission! Kudos to that!
Newsy but all in all, it was all good. But despite all this, which news is the market looking at? None of the above, with all eyes on Raghuram Rajan and his policy expected tomorrow. We all know that logically, he simply cannot bring down rates and will not risk the tottering growth by hiking rates. Yet, there is the suspense – will he, won’t he?
What is sure to play on the tone of his policy stance, apart from inflation will most obviously be the S&P rating revision. It does not really warrant any change in the policy stance but it will surely add to the optimism. S&P revision reflects the current mood of hope and positivity in India. They improved India’s rating from negative to stable stating that the new Govt at the center has the capacity to push reforms and get back onto the growth track.
At the same time, S&P also revised its outlook on 11 Indian banks and financial institutions from negative to stable. The banks are – ICICI Bank, HDFC Bank, Axis Bank, Kotak Mahindra Bank, SBI, BoI, IDBI Bank, Indian Bank, Union Bank of India, IDFC and Kotak Mahindra Prime. On the other hand, it’s outlook remained negative on Indian Overseas Bank and Syndicate Bank as it expects asset quality and capitalization to further weaken.
While on rating, it is important to know here that all the three rating agencies – S&P, Moody’s and Fitch give unsolicited ratings. Secondly, Moody’s and Fitch, all along have maintained their ‘stable’ rating and it was only S&P, which in 2012, revised it from stable to negative. And all it has done now is bring it back to stable. This means for now, we have averted the risk of India’s rating going down to ‘junk’. But at the same time, we have to realize that just as being in the ‘negative’ rating since 2012 did not really affect our FDI and FII inflows, this too will not really boost or mar investment; it is merely a sentimental positive push. But yes, on the bond markets we are sure to see some major activity.
Though moods are up, the sobering fact is that growth was hurting in July – IIP had come at much below expectations at 0.5% v/s estimate of 1.2 to1.5%. Closely on the heels of this sobering set of IIP number, the inflation numbers were also nothing to cheer about. Retail or CPI came in for August at 7.8% v/s 7.96% in July, with food inflation continuing to lead. Vegetable prices led at 15.15% v/s 16.88% (MoM) and food inflation was at 9.42% v/s 9.36%. Rural inflation continued to rule above 8% at 8.35% v/s 8.45%.
The good news is that at least crude is ruling low and that could mean that RBI could actually continue to hold on to rates. Yes, some festive cheer before the Thursday to Monday holiday begins; could help if rates are actually lowered! But that seems unlikely. So all fingers and toes crossed for the policy tomorrow. A pause would be better than a hike.