S&P cut unlikely to have adverse impact on mkts

Written by Bijay Shankar Patel | Sunny Verma | New Delhi | Updated: Apr 27 2012, 05:40am hrs
Standard & Poors revision of Indias sovereign credit outlook to negative from stable is unlikely to have an adverse impact on the countrys financial markets, analysts and finance ministry officials said. The outlook has been revised when Indias sovereign rating is still below that of many European countries such as Italy, Ireland and Spain, which are battling recession and have build up much higher proportion of public debt.

We do not think the outlook revision will impact capital inflows. The countrys growth prospects are intact, and India continues to be an investment destination, a senior finance ministry official said. The year 2011 has seen downgrade of sovereign ratings for some 20 countries; Indias competitive position is better than others, the official said.

Stocks and bonds closed marginally lower on Thursday. The benchmark BSE Sensex closed down 21 points at 17,130, while the yield on the 10-year government bond was trading one basis point higher on Thursday. Some government-owned companies such as PFC, REC and IRFC could be forced to give higher returns on their bond sales to attract foreign investors as a fallout of S&P action.

Kotak Mahindra Bank chief economist Indranil Pan said S&P move would not have a sustained negative impact on Indian equities, as most concern areas such as the high fiscal deficit, lack of reforms, rising current account deficit are known and factored in by the markets. We believe that most of the fundamental problems are already known to the market. With investor sentiment already broadly negative, apart from a knee-jerk reaction, the outlook change of the S&P should unlikely be a new negative event for the markets, Pan said.

S&P also warned of a one-in-three chance of a rating downgrade in the next couple of years. The agency has affirmed Indias long-term sovereign credit rating at BBB-, the lowest investment grade. The outlook was revised to negative due to persistent external risks to the economy, high fiscal deficit, heavy debt and a weakened political setting that could slow reforms.

In comparison, S&P has given A rating to Spain, which means strong capacity to meet financial commitments. Spans economy is facing troubled times as it has plunged back into recession in the first quarter of 2012. Besides, the ratings of another two beleaguered European economies Italy and Ireland are also above India. Currently, ratings of these countries are BBB+, one notch above that of India.

Indias rating is also at the bottom among the BRICS, which include emerging economies like Brazil, Russia, India, China and South Africa. The sovereign rating of China is AA-, one notch down than the highest grade, while the rating of Brazil is BBB, South Africa (BBB+) and Russia (BBB).

The debt burden of Italy is likely to be around 125% of its GDP this year while the government has recently forecast 1.2% contraction in GDP in 2012. On the other hand, the deficit of Irish economy is likely to be 8.2% of GDP this year. S&P expects Indias debt-to-GDP ratio to be around 71% in 2012-13, with interest payments being 25% of government revenues. Pan said this ratio is unlikely to be a cause of concern from a long-term perspective.

Indias fiscal deficit is pegged at 5.1% of GDP in 2012-13, down from 5.9% in 2011-12. Finance minister Pranab Mukherjee on Wednesday termed the S&P action as a timely warning. Analysts were sceptical whether the government would be able to contain the fiscal deficit target and 7.6% growth projected for 2012-13.