S&P warns of rating cut after 2014 elections

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SummaryRatings agency Standard & Poor’s on Thursday said it may lower...

Ratings agency Standard & Poor’s on Thursday said it may lower India’s sovereign ratings after the national polls, due in May 2014, if the next government does not appear capable of reversing the country’s low economic growth, but promised to raise the current negative outlook on the rating to stable if the post-poll dispensation has a credible agenda to restore growth.

S&P on Thursday affirmed ‘BBB-’ long-term and ‘A-3’ short-term unsolicited sovereign credit ratings on India. BBB- is the lowest among S&P’s five investment grade ratings starting with AAA. A downgrade could lower India’s ratings into speculative grade, which implies the issuer presently has the ability to repay but faces significant uncertainties that could affect credit risk.

Indian authorities have been nearly dismissive of credit rating agencies, especially S&P, as they believed these agencies were “crystal-gazing” and overstating country’s deficit worries and growth slowdown. When S&P said in September that the chances of India getting downgraded over the next two-three years were one-in-three, economic affairs secretary Arvind Mayaram had cited the IMF’s lowering of the global growth estimate, India’s recent policy push to large infrastructure projects, a bumper harvest that would spur agriculture GDP, etc, to counter the downgrade threat.

When the agency affirmed its negative outlook on India’s rating in May this year, finance minister P Chidambaram had said his ministry’s case (to S&P) was that the country deserved an upgrade both on the outlook and the rating. The minister had then promised to take measures to improve key indicators, particularly to lower the current account deficit (CAD) by curbing gold imports, and this has since yielded results.

Fitch Ratings maintains a ‘BBB-’ sovereign rating and a ‘stable’ outlook for India, while Moody’s has assigned a ‘stable’ outlook and a ‘Baa3’ rating.

The CAD, that was originally projected to be at $70 billion for this fiscal, is now re-estimated to be less than $60 billion by the finance ministry. Prime Minister’s Economic Advisory Council’s chairman C Rangarajan, who initially projected CAD for the year at $70 billion or 3.8% of GDP, has also recently said a substantial reduction in CAD seems possible and that it could be in the range of $60 billion.

In line with this, S&P considers CAD to narrow slightly to about 3.7% of GDP by March 2014, mainly because of restrictions on the import of gold and weaker domestic demand.

S&P wants the next government to give a credible

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