It’s Raining downgrade on India, By Rating Agencies

Well, it seems that downgrading India Inc is looking very ordinary task for the rating agencies. It is also making it to the headlines for quite some time now. Firstly in April 2012, S&P lowered the outlook of Indian economy to ‘negative’ from ‘stable’ and then recently it further warned that India may lose its investment grade rating and could be the first fallen angel among the BRIC nations. Couple of days before another rating agency named Fitch, lowered the outlook for Indian economy in the similar line of S&P with raising many concerns. Fitch has also downgraded the outlook of eight banks and Indian financial institutions from ‘stable’ to ‘negative’ yesterday.

Do we need to take these serial downgrades by global rating agency very seriously? If yes, then why government is ignoring it and if No, then the creditability of these rating agencies can be questioned? It seems that no one has any definite answer but the due course of time will tell us know where Indian economy is headed.

Earlier, after S&P’s move the finance minister has slammed S&P, saying that the process it follows is not transparent and the Indian economy is in much better shape than perceived by the rating agency. At present it seems that the eight banks and  financial institutions have also ignored the actions by the rating agency as they pared some gains with the broader markets yesterday.

These eight banks and financial institutions include major banks like State bank of India (SBI), Punjab National bank (PNB), Bank of Baroda (BOB), Bank of Baroda (New Zealand) (BOBNZ), Canara bank, IDBI bank, ICICI bank, Axis bank, Export-Import bank of India (EXIM), Housing and Urban Development Corporation (HUDCO) and Infrastructure Development Finance Company (IDFC). Fitch is of the opinion that given the India’s weakening economic and fiscal outlook, slowing business reforms and inflationary pressure could put further pressure on their future asset quality. Further, Viability Rating (VR) (designed to be internationally comparable and represents Fitch's view as to the intrinsic creditworthiness of an issuer) of these institutions may be impacted more going ahead.

Investors should understand that usually the performance of the bank and other financial institutions is highly correlated with the country’s economy. If the economy is in good shape, the banking sector is also well versed or it is vice-versa. Hence the rating agency’s view of earlier revising the outlook to negative for the economy and later downgrading the institutions is understandable.

Going ahead banks may face some pressure on their margins and the asset quality. And hence one has to be very stock specific rather than looking at the macro environment. Even after RBI has maintained its “Status Quo” on the repo rate and CRR front, we believe this would actually not really affect the banks.

We have always informed our readers and investors through previous articles that Indian economy is going through tough times and we continue to believe in the same. Dark clouds like Rupee depreciation, Inflationary risk, slowing growth and the rising deficits are still hovering on the economy. Our advice to all Investors would be to stay cautions and play safe in the markets.