Positive investor sentiment, which got a boost in the run-up to the Lok Sabha polls, is likely to be sustained following the thumping victory of the National Democratic Alliance, said Moody's Investors Service. JPN/Agencies
Standard & Poor's said the reforms initiative and fiscal policies in the next two-three months will have a significant bearing on the country's credit rating.
"The challenge for the next government is to regain fiscal prudence in a sustainable way. Implementation of goods and services tax could help stabilise government revenues, while potentially improving the country's growth prospects, by promoting inter-state transactions," S&P said in a note.
S&P assigned the lowest investment grade rating of 'BBB-' to India, which is under watch for a possible downgrade. S&P credit analyst Takahira Ogawa said: "What the next government says and does in the coming months is crucial to boosting confidence in the policy settings and the economy. If confidence rises, investment and consumption in India could strengthen, after being held back by the uncertainty surrounding the election."
The NDA is set to win elections to the Lower House of Parliament with a wider margin than expected and may get more than 330 seats in the 543-seat Lok Sabha.
Fitch Ratings said: "A government with a clear mandate reduces uncertainty and increases the chances of decisive policy action to address the economic challenges India faces. We will see whether the new government takes those chances."
It said the new government should focus on bringing growth back to higher sustainable levels, which would require a strong pick-up in investments.
The significant parliamentary majority won by the NDA is likely to sustain investor sentiment, which has recently boosted equity indices and the rupee, said Moody's, which also projected a downside risk to 5 percent GDP growth this year.
While policy measures to revive the economy are likely over the coming months, India's growth, fiscal and inflation metrics are unlikely to improve immediately, it said.
"We expect GDP growth to continue to be below potential, at about 5 percent this year, and the possibility of a sub-par harvest due to El Nino effects poses downside risks," Moody's said.
Outlining steps to strengthen the investment climate, Fitch said a clear strategy for fiscal consolidation, enhancing fiscal credibility and creation of a low-inflation environment would be essential to restore confidence.
Treasury heads see poll-driven Re rally fizzling out soon
Although the rupee attained new highs on the poll outcome, analysts are sceptical about the sustainability of the rally going ahead.
The rupee ended the day at a fresh 10-month high rallying 50 paise at 58.79 on Friday compared to the previous close of 59.29.
"There are still some uncertainties regarding longer-term policies of the new government and whether the improvement of the rupee's external balances and domestic inflationary pressures can be sustained," HSBC said in a report.
The brokerage firm sees the local currency at 62 by year-end.
Experts believe that the election results will initially bring inflows from overseas investors which would help the rupee touch 58 level but the Reserve Bank will intervene and limit the currency's gain at that level.
"Inflows from FIIs will come now and we can see the rupee appreciating to 58 level but RBI will not allow the rupee to rise beyond 58 level," Standard Chartered Bank's Agam Gupta said.
According to AV Rajwade, director at AV Rajwade & Co, allowing this kind of appreciation of the rupee will not be good for the real economy.
Market participants said the next triggers for the rupee will be the budget, inflows from overseas investors, new Cabinet and the policies such as monetary, exchange rates and on inflation control which the new government will formulate.
"The next big trigger for the market to watch will be the budget and also as how FIIs flows behave," Harihar Krishnamoorthy, treasurer at FirstRand Bank said. He sees the rupee trading in a 59-61 range for next few days.
Positive investor sentiment, which got a boost in the run-up to the Lok Sabha polls, is likely to be sustained following the thumping victory of the National Democratic Alliance, said Moody's Investors Service.