India's rating could return to junk status

Font Size

Print

Feedback

Email

Discuss

Related Articles

Indo-Pak trade hits new low after Mumbai attacksRate cuts may be part of stimulus plan: NathRate cuts may be part of stimulus plan: NathInflation falls to 8.40 pct, at 7-month low

Hong Kong, July 18:: a confidence vote next Tuesday. A defeat could mean an early election.

Earlier this week, Fitch Ratings lowered the outlook on India's BBB-minus local currency rating to negative from stable but maintained the stable outlook for its foreign currency rating, also at BBB-minus.

This is symptomatic of the dichotomy that is emerging between India's domestic and external balance sheets.

"The external position is reasonably comfortable," said Yang-Myung Hong, an analyst with Lehman Brothers, referring to government borrowing of $56 billion out of total external debt of $221 billion, compared with currency reserves of $312 billion.

"The bigger issue is the fiscal and current account situation," he said, predicting that Fitch would downgrade India's local debt rating to BB-plus this year.

While S&P, like Fitch, rates India's foreign and domestic debt at BBB-minus, Moody's rates its domestic debt two notches lower than its foreign rating.

"We have maintained for a long time that with a debt-to-GDP ratio of nearly 80 per cent and debt-to-revenue ratio of 350 per cent, local currency ratings should not be investment grade," Mitra of Moody's said.

A local ratings downgrade would reflect domestic fundamentals but could scare foreign investors.

"Foreign investors will look at the local currency rating as well. It is an indicator of the budgetary position of the government," said Irene Cheung, head of sovereign debt research at ABN AMRO.

A lower rating would also raise borrowing costs for Indian companies, eroding profits and putting more pressure on stocks.

Foreign funds have already cut their investments in Indian debt and stock markets by $6.3 billion this year to $31.2 billion. A downgrade is likely to speed the outflow.