India's credit rating is likely to withstand a surge in the sales of shares and bonds by overseas investors triggered by a growing tax row, rating agencies Moody's and Fitch told Reuters on Thursday. "India's external balances are strong relative to peers on some accounts, and can withstand the current outflows, for instance due to the high level of foreign-exchange reserves," Thomas Rookmaaker, director at Fitch's Asia-Pacific Sovereign Group, wrote in an email to Reuters.
Fitch affirmed its "BBB-minus" and "stable" outlook on India last month. Overseas funds chalked up their biggest single-day sales of Indian shares and bonds in a year and a half on Wednesday, fuelling concern Asia's third-largest economy will drive off foreign investors with its minimum alternate tax (MAT). On Thursday, the government set up a panel to suggest ways to resolve the MAT dispute as well as some other tax issues. Meanwhile, Moody's, which revised India's "Baa3" sovereign rating outlook to "positive" from "stable" last month, said its view reflects a 2-5 year horizon, rather than near-term growth, where the impact of outflows might be felt.
"If reforms are implemented as planned, that would be quite positive," Moody's sovereign rating analyst Atsi Sheth told Reuters in a telephone interview. Indian stocks are now the worst performers in Asia in the year to date, in terms of local currency, driven by concerns over tax policy, a delay on a key land bill and global risk aversion. Moody's said uncertainty about the tax policy was "negative" for investor sentiment, but markets were recognising that pace of reforms in India was "slow and uneven". "I think this particular issue has detracted from the reform efforts from a sentiment perspective. However, the reform effort is much broader than this issue alone," Sheth said.
Fitch said the long-term impact of foreign fund outflows was "not yet clear". "It may lead foreign portfolio investors to think twice in the future, although India's strong growth outlook compared with many of its peers may attract them anyway," Rookmaaker said.
