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Raters turn on heat
US-based rating agencies have turned the heat on India. First, Standard and Poor dowgraded India's sovereign rating to the speculative grade; now Moody's Investor Service has announced it is slated to follow suit. Since these rating agencies have attracted flak for failing to foresee the East Asian crisis, it may be they are playing safe by downgrading India. But there is more to the rating game than meets the eye. By denying investment grade rating, the country is being forced out of the medium and long term international debt market. Foreign lending interest rates to India will go up. Lenders will also tighten limits. This is tantamount to pressuring India to go in for short term borrowings; and to get it to widen its doors to foreign portfolio investment. The country must avoid this dangerous switch. East Asia's plight arose precisely because foreign short term credit was available to it for the asking. Foreign portfolio investment in India is presently of the order of $10 billion; had this been $30
billion, the country would have been held hostage by the rating agencies. The first response to a rating downgrade must be to put a cap on short term foreign borrowings and tighten regulations on foreign portfolio investment, even shut out access to the gilts market.It is curious that with every step forward in reform, the country's rating has declined. P Chidambaram has sharply lowered tax rates in the latest episode of reform. But raters use slowing reform as an excuse to tick off India. Actually, the rating should not go down given the fact that international funds are seeking avenues for investment in the wake of the East Asian debacle. Besides, as pointed by the latest annual report of the Reserve Bank, all measures of the country's external indebtedness have conspicuously improved. Moody's have discovered a weakness in the current account deficit even though it is slated to be short of 1.6 per cent of GDP in a year in which the affordable level is 2 per cent of GDP. True, raters must rate but thereis no telling what their agenda is. One desirable fall out of foreign credit turning expensive is that corporates will look for domestic credit; this shift will strengthen as the rupee depreciates. Second, policy will now favour FDI rather than foreign portfolio investment. Finally, top corporates,including foreign investors in industry, will not be lackadaisical to exports.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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