The global impact of policy calls may affect our rupee ambitions

Limited fiscal headroom and ideological signals of trade policy could get in the way of efforts to globalize India's currency

- MADAN SABNAVIS

One of the most significant yet economically speaking irrelevant recent developments was a downgrade of the US sovereign debt rating to AA + from AAA by Fitch Ratings. It is significant because this elicited umbrage from the US Treasury, as downgrading the creditworthiness of Uncle Sam is considered a highly disrespectful thing to do. The fact that the US government embarrassingly hits its debt ceiling (which has now been disbanded) every now and then is reason enough to consider a downgrade. Add to this the tricky issue of impounding Russian money stacked in US Treasury bills. If a government for any reason decides to not pay a creditor, it is a technical default. Hence, the irony of today’s scenario is hard to miss.

The Fitch downgrade is irrelevant because at the end of the day, it means nothing. AA + is as good as AAA, and the difference is only one of reputation. The UK and EU have a rating of AA, while Japan has A +. Germany along with smaller European countries like the Netherlands, Switzerland, etc, have AAA. Markets reacted for just about a couple of sessions and then reverted to normal. Back in 2011, S&P had downgraded US sovereign debt to AA+ and has left it at this level for over a decade. The usual disdain for the agency’s decision was expressed, but it was soon business as usual.

Rating agencies have clearly been biased while rating India. Our rating remains at BBB-, notwithstanding a rather outstanding performance on the economic front on almost all parameters, with the only sore point—which is brought up routinely— being the state of fiscal balances. This has come in the way of a rating upgrade, which seems to be necessary for us to move towards internationalizing the rupee. But such a focus on fiscal balances also raises some anomalies.