How Chidambaram averted a sovereign rating downgrade?

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How Chidambaram averted a sovereign rating downgrade?
In late Jan and early Feb, a currency contagion almost engulfed emerging markets including those in South Africa, Argentina, Turkey, Ukraine with even fundamentally strong currencies like the Mexican Peso coming under fire.

The Indian rupee did not budge and remained resilient as it has in the last several months, ever since it sunk to 68.81 against the dollar in Sept last year.

In fact, in the last several months there has been a manifold improvement in economic fundamentals, which has kept the rupee rock solid. On a few key economic parameters, Finance Minister P Chidambaram has done remarkably well and averted an almost certain sovereign rating down grade to "Junk" from global rating agencies. In fact, it's been long since news channels have interviewed rating agencies, asking them of the chances of a ratings downgrade. Take a look at what has improved in the last several months and how Chidambaram has averted a ratings downgrade.

Current account deficit (CAD) well under control

When Chidambaram inherited the economy, the current account deficit was in shambles. In fact, in the previous fiscal it reached 4.8 per cent of GDP. It is now set to end the year at around 2.5 per cent GDP - a level which many economists see as well under control.

The government and the RBI intervened through curbs on gold exports and liberalising forex swaps to help the deficit. A number of other initiatives by the RBI and the government were taken to boost exports, which in turn reduced the trade deficit and the current account deficit. If the CAD is under control, which it is right now, the currency will be under control. Read CAD and its impact on currency here

Our forex reserves are healthy and we should not worry any longer of the US Federal Reserve's decision to taper QE3 further. Read more on QE3 here

Fiscal deficit under control

On numerous occasions Chidambaram has said that the "red line" on fiscal deficit would not be breached. The fiscal deficit for 2013-2014 is likely to come in at 4.6 per cent of GDP which is much lower than 5.8 per cent seen in 2011-2012, when Chidambaram took charge of the Finance Ministry. The last two years under Chidambaram has seen a gradual decline in the fiscal deficit. Of course, he has been shrewd enough to ask PSU companies to pay interim dividends now and also pushing subsidies to the next year.

CPI inflation at 2 year low

After months of battling with inflation, there are signs that the measures by the RBI and the Government may have worked. CPI inflation for January has come in at a two year low, while WPI inflation has come in at a eight month low of 5.05 per cent.

If the current account deficit, fiscal deficit are under control and price stability is achieved there is no way that rating agencies are going to downgrade India.

For the time being at least we have averted a ratings downgrade, which towards the middle of last year looked almost certain. At least for a change we should not be cynical and applaud Chidambaram and the RBI.

GoodReturns.in

Story first published: Tuesday, February 18, 2014, 9:03 [IST]
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