Expectation of stable outlook by S&P warranted: Yes Bank

The expectation of a stable outlook was warranted, perhaps as this has been work-in-progress since September 2012, says Shubhada Rao, president and chief economist, Yes Bank, reacting to Standard & Poor’s affirmation its ‘triple B minus’ long-term and ‘A-3’ short-term unsolicited sovereign credit ratings on India.

Speaking to CNBC-TV18, she says the government has been able to take some steps, particularly addressing the issues on current account deficit (CAD) or making a resolve to stick to its fiscal consolidation path. But revival in investment will take a little while longer, because it is contingent upon the passage of certain bills which would improve sentiment like Land Acquisition Bill or a goods and services tax (GST). But quite clearly there were more positives on board, and therefore an expectation of at least a stable outlook was warranted, she says.

Here is the edited transcript of her interview with CNBC-TV18

Q: Finance ministry's sales pitch to a particular ratings agency, S&P in this case, doesn't seem to have worked. Do you agree with the view taken by S&P or do you think this was a case for change of outlook, at least that a change of outlook was perhaps warranted given the fact that the government has delivered on the promise of fiscal consolidation, and taken action on things like diesel decontrol. Do you believe an outlook change was warranted?

A: I think an expectation of a stable outlook was warranted perhaps because this has been a work-in-progress since September 2012. The government has been able to take some steps, particularly addressing the issues on current account deficit (CAD) or making a resolve to stick to its fiscal consolidation path.

In terms of investment revival or investment environment, for that to improve will take a little while longer, because it is contingent upon the passage of certain bills which would improve the sentiment like a Land Acquisition Bill or a goods and services tax (GST) coming on board. But, as far as initiation of steps is concerned, quite clearly there were more positives on board, and therefore an expectation of at least a stable outlook was warranted. I think a rating upgrade is a little while away because a lot of steps need to see implementation particularly on the investment side, on the power sector side resolving the issues on fuel linkages and taking on board some of the key concerns of mining, ministry of environment and forest facilitating those decisions. I think these will improve the climate, but as I said it is work in progress.

Q: While you do believe there was a case for change in the outlook to stable you are saying that an upgrade possibility is still a while away. But what about the possibility or the threat of a downgrade as S&P goes on to say that there is a one in three chance of a downgrade over the next 12 months. They say that they are rightfully concerned because there is a paralysis in the parliament, no legislative action has taken place in the last session, it is unlikely the monsoon session will be any different. They also believe that while the government has made efforts on getting the investment cycle going through the CCI, etc, there has not been any evidence yet to suggest that we actually have seen the investment cycle start. How real is the threat of a downgrade that S&P has held out?

A: I do not really think that the ratings downgrade risk is real. Let’s look at it issue wise. First, the subsidy issue. I think the crude oil prices correcting lower and limited upside risks to the crude oil prices, the issue of under recoveries and therefore the risk of subsidies ballooning probably is abating now, those risk are abating.

So, we do not see risks of subsidies rising humongously. In fact, they could be contained and the government has continued with its diesel pricing getting closer to the market prices. There have been frequent periodic corrections and that should help.

Second is of course the investment revival. We have always maintained that it will take a little while longer for the private sector investment to come back in a robust manner, but clearly I think the initiative has to be led by capital spending of the government.

I think government needs to expedite its plan expenditure and implementation which would help in crowding in some of the investment. We are anticipating a small investment recovery in the second half of the year.

Very important to these would be the monsoon session of the parliament once again. If the government is able to derive a consensus view on most of the critical bills that need the green field projects to take off, I think once those bills see a passage we do not see those risks emanating which the S&P seems to have outlined that of a downgrade if there is complete absence of investment revival.

We do not see a complete absence of investment revival. We see a small recovery in investment cycle in the second half. So, in total I would like to say that risks of downgrade are not there.