International national rating agency Standard and Poor’s (S&P), on Monday, warned that India could lose its investment-grade rating due to slowing GDP growth and political road-blocks to economic polic-making.
In a report released by S&P Ratings Services titled: “Will India Be The First BRIC Fallen Angel?,” the agency explained that the slowing GDP growth and political roadblocks to economic policymaking are just some of the factors pushing up the risk that India (unsolicited BBB-/Negative/A-3) could lose its investment-grade rating.
In the process, India may become the first among the BRIC - Brazil, Russia, India and China - countries to lose its investment-grade rating. Currently, the ‘BBB-’ long-term sovereign credit rating on India is currently one notch above speculative grade.
The report states that the Indian government’s reaction to potentially slower growth and greater 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.
“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 S&P credit analyst Joydeep Mukherji.
S&P revised the rating outlook to negative from stable in April 2012, because of India’s lower GDP growth prospects and the risk that its external liquidity and fiscal flexibility may erode. The negative outlook also reflects the risk that Indian authorities may be unable to react to economic shocks quickly and decisively enough to maintain the country’s current credit worthiness.
“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 liberalisation, in the event of unexpected economic shocks. Such potential backward steps could reverse India’s liberalisation of the external sector and the financial sector,” said Mukherji.
The report examines the forecasts for economic growth, and the possible effects on business confidence and the government’s commitment to economic reform.
It also suggests that despite the recent problems, the Indian economy remains in much better shape to withstand this period of heightened global uncertainty than it was in the early 1990s, when it suffered a balance-of-payments crisis.
Meanwhile, domestic equities reacted strongly on Monday, with the popular bourse BSE’s benchmark Sensex falling 0.33 per cent into the red to 16,622 points, after having hit an intra-day high of 16,893.81, while in the bond market, the country’s benchmark 10-year bond yield showed a more muted reaction, trading down 1 basis point at 8.34 percent from its previous close.