S&P outlook a cause for concern

Written by fe Bureau | Mumbai | Updated: Feb 26 2009, 05:16am hrs
The move by international credit rating agency Standard & Poors (S&P) Ratings Services on Tuesday to revise its outlook on the long-term sovereign credit rating on India to negative from stable has set off a flurry of concern amongst India Inc and fund managers. While, the concern that the outlook downgrade will be followed by an actual ratings downgrade seems well placed, some experts mention that this could not be a reason for a panic.

Says, Amit Goyal, president Confederation of Indian Apparel Exporters (CIAe),The negative ratings will have an adverse impact on foreign investment in India Inc. The ratings will take India in the defaulters league internationally.

Amit Tandon, managing director, Fitch Ratings reckons that this move could pose a problem for Indian corporates, especially those who had plans to raise funds overseas.

The telecom sector is expected to face the wrath of the change in outlook. Indranil Deb, principal, Mobius Strip Capital Advisor says, Corporates in the telecom sector would usually source from countries like Japan where the inflation was much less and the borrowings were at a lower interest rate. But now, the projects on which these telcos were backing on are becoming riskier and therefore they themselves would shy away. Where as, international investors would be reluctant to pool in investments as the sovereign ratings are negative and there is a high chance of default.

The international rating agency said, the outlook revision reflects its view that Indias fiscal position has deteriorated to a level that is unsustainable in the medium term.

However, disagreeing with Indias growth towards the negative curve, Goyal added that despite a whirl of global summitry, Indias growth rate is projected at 6% compared to its neighbouring countries that are growing at an alarming rate of not more than 2-3%.

The banking community does not seem much perturbed about the change in outlook. KC Chakrabarty, chairman and managing director, Punjab National Bank, while mentioning that the cost of borrowing overseas could escalate, says, The credit rating agency has just revised Indias outlook to a negative one and the next stage will be the downgrading of the countrys rating which has not happened so far. TS Narayanasami, chairman and managing director, Bank of India reckons that stronger companies would still be able to raise funds at competitive rates overseas. He also adds, There is no scarcity of money on the domestic front for other companies in the country.

Another banker with an overseas bank avers that India has been through these outlooks and ratings earlier and has managed to come out glowing. This is another test for the country, and it has to shine through, he adds.

A section of analysts were expecting this move and reckon that this was inevitable considering the crisis that the global economies and India faced. It was something the government and the policy makers had to do in order to tide over the difficulties, they reckon. The move will definitely have consequences in terms of rising borrowing cost and increased risk aversion, however, it is being seen as a lesser of an evil. At this time, increasing the fiscal deficit is the wisest step taken by the government. In such a scenario, private spending would take a backseat. It would concern us if the demand does not increase. It would be a setback for the economy, says Hitesh Agrawal, head of research, Angel Broking

The downgrade by S&P will have some impact from the FII perspective. These kinds of country rating might impact the inflow of investment. However the rating would not impact economic activities, commented Aparup Sengupta, managing director and chief executive officer, Aegis.