Delay in rating upgrade hard to explain: RBI

Delay in rating upgrade hard to explain: RBI
ENS ECONOMIC BUREAU

MUMBAI, APRIL 8: The Reserve Bank of India (RBI) said on Saturday it was difficult to explain a delay in upgrading India's credit rating to investment grade by international rating agencies.

India is rated below investment grade by both international rating agencies, Moody's Investors Service and Standard & Poor's. Both agencies maintain a positive outlook on India.

Deputy Governor of the central bank Y V Reddy told a seminar in Hyderabad, India had a very good external debt servicing record and, even during the 1991 external crisis, had not defaulted on any obligation. "In view of this unblemished record and current economic strength, it becomes difficult to explain the credit rating agencies' delay in upgrading India's credit rating to investment grade," Reddy said.

"Clearly there is a need to improve our articulation of both the country's social ethos and our economic strengths and thus enable the credit rating agencies also to enhance their appreciation of our track record and strengths in the external sector," he said. While an investment grade rating may facilitate a sovereign borrowing by the country, there were currently several disadvantages of borrowing abroad, Reddy said.

These outweighed the benefit of benchmarking that domestic corporates will get out of the sovereign borrowing, he said. ".. For several reasons, it is neither necessary nor desirable at this juncture for Government of India to seek sovereign borrowing in foreign currency in international financial markets, but the issue could be reviewed some time in future," Reddy said.

Reddy further said the Centre should resist from sovereign borrowing at this juncture. "It is neither necessary nor desirable at this juncture for the Government of India to seek sovereign borrowing in foreign currency in international financial markets," Reddy said, adding "the issue could be reviewed some time in future".

"Though sovereign borrowing is advocated for India on the ground that it will help develop a benchmark favourable to bond issues by our corporates in international markets, there are at present several disadvantages in sovereign borrowing that outweigh, in my view, the extent of possible benefit of benchmarking to our corporates," he said.

He also focussed on the need to resolve the issuance of `letters of comfort' by central and state governments which are considered as a close substitute to government guarantees for bond issues by central and state level enterprises.

Though the concerned government do not treat the letters of comfort as government guarantees, the increase in the magnitude of bonds issues will have significant implications for both financial markets and fiscal transparency, Reddy said.

A critical need for credit rating has arisen with the increasing trend of various state government resorting to borrowing. The RBI has to consider the stance taken by the credit rating agencies and the perception of investors in states' securities, Reddy said. RBI has considered the status of state finances an important item on the agenda at the biannual conference of state finance secretaries convened for the last week of April.