S&P maintains negative outlook on India's rating

Painpoints: Capital outflows, falling rupee

Rating agency Standard & Poor's has maintained its negative outlook on India's BBB- sovereign credit rating, the rating agency said on Tuesday.

Recent measures taken to restrict capital outflows have increased uncertainty among foreign and domestic investors, said Kim Eng Tan, senior director, sovereign and international public finance, Asia Pacific at S&P, in a statement.

"We view the capital outflows and depreciating rupee as an indication of weakening investor confidence in India ... We maintain a negative outlook on India's BBB- sovereign credit ratings," Tan said.

'BBB-' is the lowest investment grade and a downgrade would mean pushing the country's sovereign rating to junk status, making overseas borrowings by corporates costlier.

Referring to the recent measures announced by the government to restrict capital outflow, Tan said these "have also increased uncertainties among investors both foreign and domestic".

"It is, however, too early now to tell if this scenario will come to pass. This will be largely dependent on policymakers' reactions to these latest developments," Tan said.
S&P's comments come on a day when the rupee touched the record low of 64.11 to a dollar in intra-day trade on Tuesday. In order to tame the sliding rupee, the Reserve Bank and the government had on August 14 announced stern measures, including curbs on Indian firms investing abroad and on outward remittances by resident Indians.

In May, S&P had warned that it may downgrade India's sovereign rating to junk grade if the government fails to pursue reforms and check deterioration in fiscal and current account deficits.

India has the lowest investment grade rating and S&P is the only agency which has a negative outlook while Moody's and Fitch have a stable outlook on India.

Moody’s retains rating

Moody's Investor's Service in its report on Tuesday said the depreciating rupee is likely to inflate the fuel subsidy bill, weaken the credit quality of oil companies and put pressure on the fiscal deficit.

"While the current rupee depreciation may be a new development, the factors that underpin it are not, and have been incorporated into the Baa3 rating," Atsi Sheth, Moody's Investors Service vice-president and senior credit officer at its sovereign risks group, said in a note on Tuesday.

This is because the current sovereign rating of Baa3 incorporates the macroeconomic challenges of weaker growth, the steep plunge of the rupee and the twin deficits, Sheth said.