Fitch revises Indian currency outlook to negative

Reacting to ?the considerable deterioration in the central government?s fiscal position in 2008-09, coupled with a notable increase in government debt issuance to finance subsidies,? Fitch Ratings revised its outlook on India?s long-term local currency to negative from stable, while affirming the rating at ?BBB-? (BBB minus).

However, other major rating agencies such as ICRA which has a tie-up with Moody?s and Crisil, a subsidiary of S&P have refused to divulge their action plans after Fitch announced such a move.

On asking experts how this rating would impact the Indian corporates, they said there may not be a significant impact on the borrowing programme.

?I don?t think it would have any major impact on the borrowings by Indian corporate entities. The rupee denominated debt market in India does not usually factor in local currency ratings by global credit rating agencies for the pricing decisions. This would act more as a signal to the financial market in general,? said PK Choudhury, vice chairman & group CEO with ICRA.

TK Bhaumik, chief economist with Reliance Industries too feels there would not be a significant impact on corporates, however, looking at the current economic scenario, mid-sized corporates will have a tough time over the next five to six months unless interest rate scenario is clear to them and the economy picks up.

Rugved Dhumale, senior manager of risk management solutions at Mecklai Financial and Commercial Services concurs.

?While there may be a slight impact on the borrowings of Indian corporates, it may not be a big one. What could be affected drastically are the government bonds which would fall drastically, taking up the yields,? he said.

At the same time, Fitch affirmed India?s long-term foreign currency rating at ?BBB-? with a stable outlook, its short-term foreign currency outlook at ?F3? and country ceiling at ?BBB-?.

?The revision to the local currency outlook is based on a considerable deterioration in the central government?s fiscal position in 2008-09, combined with a notable increase in government debt issuance to finance subsidies not captured in the budget,? said James McCormack, head of Asia Sovereign ratings, Fitch.

The agency said the central government deficit may increase from 2.8% of GDP in 2007-08 to 4.5% of GDP in 2008-09 based in part on higher on-budget subsidies, interest payments and public wages.

They also expect bonds issued to oil and fertiliser companies to reach at least 2% of GDP this year, implying an underlying central government deficit of 6.5% of GDP or higher. ?Future rating actions with respect to India?s local currency rating will depend largely on whether 2008-09 fiscal slippages is reversed, which would allow for a resumption of the decline in India?s high government debt ratios,? said McCormack.

The 10-year bond yield ended at 9.48%, compared with Monday?s close of 9.38%.

Talking about inflationary concerns, Fitch believes that with the wholesale price index approaching 12%, there would be further monetary tightening ahead.

?Weaker economic growth and higher real interest rates would affect the fiscal outturn and further undermine international capital flows,? they said.

Fitch Ratings has, on Tuesday, downgraded Reliance Infrastructure Ltd?s (R-Infra, formerly Reliance Energy Limited) national long-term rating to ?AA+(ind)? from ?AAA(ind)?. Its Rs1,500 crore non-convertible debenture programme, outstanding fund-based bank limits of Rs1,500 crore and non-fund based bank limits of Rs1,500 crore also are downgraded to ?AA+(ind)? from ?AAA(ind)?. All the ratings are removed from rating watch negative.The downgrade reflects a change in R-Infra?s business and financial risk profile, with its diversification into power project construction, roads, mass rapid transport system (MRTS), commercial real estate space and mega power generation plants. This represents a departure from the group?s strategy of focusing on the stable regulated business of power generation and distribution, which earns cash flows linked to an assured return on capital.

Fitch Ratings, on Tuesday, revised NHPC Ltd?s (NHPC, formerly National Hydroelectric Corporation Ltd) outlook for its long-term local currency Issuer Default rating (IDR) to negative from stable while affirming NHPC?s Long-term local currency IDR at ?BBB-? (BBB minus). This follows the change in outlook for India?s long-term local currency IDR to negative from stable.