The axe could fall in the next 12 months with a BBB rating, BBB is the lowest investment grade and a downgrade will take India’s sovereign rating to speculative or junk status.
14th August 2013
Standard and Poor’s said India’s sovereign rating faces a one in three chance to be downgraded to the junk statusover the next year, dealing a huge below to New Delhi’s campaign for an upgrade. India’s weak ruling coalition, government’s modest effort to check heavy debt burden have contributed for possible effect of a downgrade from S&P. The axe could fall in the next 12 months with a BBB rating, BBB is the lowest investment grade and a downgrade will take India’s sovereign rating to speculative or junk status.
“High fiscal deficits and a heavy government debt burden remain the most significant constraints on our sovereign ratings on India. Nevertheless, the government has regained control of public finances and embarked on fresh structural reforms since September 2012” S&P credit analyst Takahira Oga Wa said.
The comments are a huge setback to the UPA government headed by Manmohan Singh, which has been arguing for an upgrade saying that the reformatory measures it took since September have improved growth prospects and the country’s credit standings. Opposition parties have disrupted most of the proceedings in the past few sessions of the Parliament, halting the government’s plan to bring in legislation that would allow FDI in sectors such as insurance and pensions and pass amendments to age old laws on land acquisition for industrial and infrastructural purposes. The S&P in a statement said though it sees signs of an improvement in the economy due to the steps taken by the government, “risks to India’s credit growth from stalled reforms in Parliament still tilt the credit risks to the downside”.
Relief from Fitch
Fitch ratings retained India’s BBB minus rating, leaving it one step above junk, or non investment grade, territory. The decision which has comforted the Indian authorities worried about a possible downgrade after Fitch cuts its outlook to negative in June 2012. A downgrade from the rating agency would have suggested a deterioration in India’s ability to repay debt which would in turn lead to withdrawal of foreign investments from the economy and increase the cost for local companies to raise debt overseas, this could also mean the rupee depreciate further against the U.S. dollar. The improved outlook would also bring some cheers to the beleaguered local debt markets which have seen outflows of more than $ 3.27 billion since May.
What happens if India is downgraded to Junk ?
S&P has currently accorded India with a BBB- with a “negative outlook” A downgrade below this would mean India’s sovereign rating would go down to junk status. In simple terms, if the rating agencies downgrade India to “junk” status, there is a possibility that there will be huge investment outflow, and an element of risk if you invest in Indian companies and in India. Since there is an element of risk, investors investing in India would start charging higher rates of interest for taking a risk, which would affect the borrowing costs for Indian companies. The downgrade to junk status would also mean withdrawal of money by foreign institutional investors or various other foreign entities, this will also have an adverse effect on the currency markets with the rupee dropping further and stock market crashing due to huge withdrawals from the investors.