S&P warns India may lose investment-grade rating

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SME Times News Bureau | 12 Jun, 2012
International ratings agency Standard and Poor's Monday warned that India may lose its investment-grade rating because of slowing growth and political roadblocks to economic policy-making, among other reasons.

The assessment jolted the equity markets, with the Bombay Stock Exchange's benchmark Sensex snapping five days of gains to close at 16,668 points, after having hit an intra-day high of 16,893.

And the Indian rupee fell to a week-low of 55.74 against the dollar weaker than Friday's close of 55.42 against a dollar. In the volatile currency markets, the rupee moved 73 paise in intra-day trade touching a high of 55.08 and a low of 55.81 during the day.

In its report "Will India be the first BRIC fallen angel", S&P said the government's reaction to the vulnerability to economic shocks could largely determine whether the country can maintain an investment-grade rating or become the first "fallen angel" among the BRIC nations comprising Brazil, Russia and China besides India.

The S&P's warning came in less than two months after it revised India's outlook from stable to negative. It reaffirmed the country's sovereign credit rating at investment grade at that time but suggested that the probability of a downgrade was higher than before.

India currently has the 'BBB-' long-term sovereign credit rating.

The report examined the forecasts for economic growth, and the possible effects on business confidence and the government's commitment to economic reform.

"The combination of a weakening political context for further reform, along with economic deceleration, raises the risk that the government may take modest steps backward away from economic liberalization in the event of unexpected economic shocks. Such potential backward steps could reverse India's liberalization of the external sector and the financial sector," said Joydeep Mukerji, S&P's credit analyst.

"Setbacks or reversals in India's path toward a more liberal economy could hurt its long-term growth prospects and, therefore, its credit quality," said Mukerji.

The report also suggested that despite recent problems, the Indian economy remained in much better shape to withstand heightened global uncertainty than it was in the early 1990s when it faced a balance-of-payments crisis that triggered the economic reforms.