JOIN USS&P lowers India's credit rating; FM downplays fears
International rating agency Standard & Poor's (S&P) on Wednesday revised India’s long-term sovereign credit rating to ‘negative’ from ‘stable’, a move that is expected to make foreign borrowing costly for corporates and is likely to slow down foreign direct investment (FDI).
S&P reaffirmed the sovereign credit rating at investment grade – ‘BBB-’ (BBB minus), but warned that the probability of a downgrade is now higher than before, stating: “....the country stands one in three chance of a downgrade in two years if external positions worsen.”
The government, however, downplayed the implication of revision of the country’s credit rating to ‘negative’ from ‘stable’ which S&P attributed to a slowdown in investment and economic growth and a widening current account deficit.
Finance Minister Pranab Mukherjee described the revision as a “timely warning” but saw no need to panic.
“We are concerned but don’t feel panicky because we are confident that our economy will grow at 7 per cent (around 7 per cent if not plus) and will be able to control fiscal deficit and it will be around 5.1 per cent.” However, he said the government will take note of the S&P’s decision to lower India’s rating outlook...and “work for achieving higher economic growth.”
A downgrade would increase borrowing costs for domestic firms and make it harder to refinance debt. Also, it could further dent the confidence of foreign investors on India, experts say.
S&P sees little progress on economic reforms and believes that the GDP growth could fall to 5.3 per cent in 2012-13, but the Centre expects a GDP growth of over 7 per cent.
“The outlook revision reflects our view of at least a one-in-three likelihood of a downgrade if the external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow in a weakened political setting,” said S&P's credit analyst Takahira Ogawa.
Dalal Street reacted strongly to the news. The BSE Sensex slipped nearly 200 points to 17,019 while the broader Nifty index slumped over 60 points to 5,160. It recovered later, but still ended lower at the day’s closing.
A lower rating will make money dearer for corporates, particularly in foreign currencies. State-run companies will be the hardest hit, since their finances are more directly linked to the government.
Sarah Hewin of Standard Chartered said that S&P’s move shouldn’t come as a surprise. The initial impact on the rupee would be muted, but the pressure on the currency would continue in the coming days as the downgrade would hurt the portfolio flows.