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S&P Cuts India Long-Term Outlook To Negative : Investment Grade Rating at Risk

Indian Economic Update

S&P Cuts India Long-Term Outlook To Negative

S&P has lowered the sovereign credit outlook on India’s credit rating to ‘negative’ from ‘stable’, on risks from slower economic growth and a widening current-account deficit, taking the nation a step closer to junk status. Standard & Poor’s Ratings Services affirmed the ‘BBB-‘ long-term and ‘A-3′ short-term unsolicited sovereign credit ratings onIndia. The transfer and convertibility assessment forIndiais unchanged at ‘BBB+’. According to the ratings, the outlook revision reflects their 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. Bonds fell, stocks declined and the INR pared gains after S&P saidIndia‚Äôs rating could be lowered.

“We expect India’s real GDP per capita growth will likely remain moderately strong at 5.3% in the current fiscal year ending March 31, 2013, compared with about 6% on average over the prior five years, but down from 8% in the middle of the last decade,” Standard & Poor’s credit analyst Takahira Ogawa said. “India’s favorable demography and the increasing middle-class population will under gird its medium-term growth prospects, which in turn will support the sovereign ratings.”

High fiscal deficits and a heavy debt burden remain the most significant constraints on the sovereign ratings onIndia. S&P expect only modest progress in fiscal and public sector reforms, given the political cycle–with the next elections to be held by May 2014–and the current political gridlock. A wake- up call for the Government, indeed!

Outlook changed to negative for PFC, IRFC, IIFC & EXIM Bank also.

Export-Import Bank ofIndia(IndiaEXIM): to BBB-/Negative/A-3 from BBB-/Stable/A-3

India Infrastructure Finance Co. Ltd. (IIFCL): to BBB-/Negative/– from BBB-/Stable/–

Indian Railway Finance Corp. (IRFC): to BBB-/Negative/– from BBB-/Stable/–

Power Finance Corp. Ltd. (PFC): to BBB-/Negative/– from BBB-/Stable/–

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