The Economic Survey 2021-22 tabled in Parliament on January 29 by Union Finance Minister Nirmala Sitharaman said that net foreign portfolio investment (FPI) inflows recorded an all-time monthly high of $9.8 billion in November 2020.
The survey credited the return of investors’ risk appetite in a renewed search for yield amid the COVID-19 pandemic for the high FPI inflows. Also, the Survey cited the weakened US dollar amid global monetary easing and fiscal stimulus packages as reasons. The Survey noted that India was the only country among emerging markets to receive equity FII inflows in 2020.
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ES-2021 said that within its sovereign credit ratings cohort, India is rated much below expectation given the number of sovereign defaults it has reported since 1990, which is zero, making it a negative outlier. It noted that India has never defaulted, unlike several of its cohort countries.
The survey stated that India’s sovereign external debt as a percentage of GDP stood at a mere 4 percent as of September 2020 (DEA), adding that 54 percent of India’s sovereign external foreign currency denominated debt was owed to multilaterals and the IMF as of end-March 2020 (DEA), which is not expected to impact credit rating assessments.
The survey also pointed out that India’s nongovernment short term-debt as a percentage of forex reserves stood at 19 percent as of September
2020 (DEA). India’s forex reserves stood at $584.24 billion as of January 15, 2021 (RBI), greater than India’s total external debt (sovereign and non-sovereign) of US$ 556.2 billion as of September 2020 (DEA), it added.
In corporate finance parlance, therefore, India resembles a firm that has negative debt, whose probability of default is zero by definition. Despite this compelling statistic, India is an inexplicable negative outlier in its ratings cohort, ES-2021 said, adding that past episodes of rating changes have no or weak correlation with macroeconomic indicators.
"India’s fiscal policy, therefore, must not remain beholden to a noisy/biased measure of India’s fundamentals and should instead reflect Gurudev Rabindranath Thakur’s sentiment of a mind without fear," the Survey said.
The Survey opined that the sovereign credit ratings methodology should be made more transparent, less subjective and be better attuned to reflect economies’ fundamentals.