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Investor anxiety about India calmed after S&P affirmation

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Standard & Poor’s (S&P) reaffirmation of India’s investment grade rating has calmed any residual anxiety about a downgrade anytime soon and increased expectations of continuing inflows into the Indian debt and equity markets as yield hungry global investors look to deploy their surplus cash in emerging markets.

Recovery in economic activity after a deadly second wave of Covid 19, improving consumer sentitment and the government’s push towards infrastructure spending will help keep investors interested in India, analysts said.

“India’s economy has been quite resilient, particularly manufacturing. Policy interventions have helped to partially counter the loss of incomes. Leading indicators are showing a robust recovery in late June and July. Consumer goods demand seems to be reviving, as well as private capex in some segments. Now that earlier concerns of a sovereign ratings downgrade seem to have abated, it is likely to be reflected in continuing foreign investors interest in India,” said Saugata Bhattacharya, chief economist, Axis Bank.

S&P is the latest among the big three global rating agencies to affirm India’s sovereign rating. In a note on Tuesday the New York based agency said the country’s strong external settings will act as a buffer against financial strains despite elevated government funding needs.

“The stable outlook reflects our expectation that India’s economy will recover following the resolution of the COVID-19 pandemic, and that the country’s strong external settings will act as a buffer against financial strains despite elevated government funding needs over the next 24 months,” S&P said.

India has been a favourite among foreign portfolio investors for the last year or so. Last fiscal ended March 2021, these investors poured in a total of $36 billion into the Indian debt and equity markets the highest since 2014-15.

Ample global liqudity due to the ultra easy monetary policies followed by global central bank in response to the Covid 19 pandemic have increased inflows into emerging markets like India. It is expected that these conditions will remain atleast for the rest of calender year 2021.

“Till external conditions support emerging markets like India will be comfortably able to finance their fiscal deficits without any problems. Even the US Federal Reserve has indicated that it will not scale back its bond buying programme anytime soon despite rising inflation. Investors will continue to look at emerging markets favourably,” said Naveen Singh, senior vice president at ICICI Securities Primary Dealership.

S&P has relied on the Indian economy’s above-average long-term real GDP growth, sound external profile, and evolving monetary settings. It has forecasted economic activity in India to begin to normalise throughout the remainder of fiscal ended March 2022, resulting in real GDP growth of about 9.5% this fiscal albiet after a 7.3% contraction in the fiscal ended March 2021.

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