S&P Warns India On Further Credit Rating Downgrade

Credit rating agency Standard and Poor’s (S&P) has warned that there is significant chance of cutting the credit rating of the country. The Indian markets on the back of this news widened their intra-day losses and closed with 0.8% losses. The rupee also fallen over Rs 53 per dollar mark.

The credit rating agency earlier in April had cut India’s sovereign outlook to negative from stable. India’s credit rating ‘BBB-‘is the lowest amongst the BRIC countries and a one notch downgrade will see India falling to the speculative grade rating and will increase the borrowing costs of the country. In June this year again S&P has reiterated that if growth prospects and external position worsens then there are one in three chances of cutting the credit rating.

The Indian government has already taken bold steps of allowing FDI in retail, pensions, Aviation, Insurance, power trading and also have increased the diesel prices. Government, in order to meet the divestment target has also approved the divestment proposal in four PSUs. Besides it is also expected to sale its stake in few blue chip companies.

With the GDP growth forecasts of the country coming down we believe that the S&P warning will put pressure on the government. The S&P has also said that the reforms are good but the execution of the same is crucial. As the government faces stiff resistance from the opposition, its task becomes increasing difficult.

The new investments are very important in the country and with the high interest rates and unstable markets there would not be too much optimism on that front. Government’s recent decision to call off the RINL IPO also reflects that the investment sentiment is not too positive and its revival is must. We at DSIJ believe that the S&P warning will put pressure on RBI when it goes for the monetary policy review this month.