The timing of the outlook revision for India?s long-term sovereign credit rating by the global agency Standard & Poor?s could not have been worse. The finance ministry apprehends S&P move could make it difficult for sectors like aviation and housing to access cheaper overseas funds through the external commercial borrowing window announced in the Budget.
The cost of borrowing is expected to rise for these Indian companies as the downgrade coupled with negative sentiment on Indian economy might spoil their chances, the government feels.
Analyzing the impact of the S&P action, a senior finance ministry official requesting anonymity said it would definitely increase the cost of borrowing for the industry, while availing of ECB for airlines and other sectors will now become particularly difficult.
S&P had said there are one-in-three chances of a rating downgrade for India (from BBB-, the lowest investment grade), if the external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow in a weakened political setting.
Experts believe that the outlook revision will scare away foreign lenders from considering Indian companies for cheaper loans. Ashvin Parekh transaction expert from Ernst and Young said, ?the S&P action will act as a double whammy as the cost of debt will go up for companies and also dollars required to repay the debt at the time of redemption will also go up?.
Extending the ECB window to capital intensive sectors like aviation, power and housing sector, finance minister Pranab Mukherjee allowed airline companies to raise cheaper overseas loans for a year to meet their working capital needs and also refinance outstanding working capital rupee loans. Government also allowed ECB to part finance rupee debt of existing power projects.
Indian companies have filed for ECBs worth $2.6 billion in February this year but Parekh feels sectors like aviation and housing will face difficulty they are sitting on huge debt and the downgrade will further dampen their chances. He added that only high risk investors will look at India while others will be wary of making investments.
Since April this year, Foreign Institutional Investors (FIIs) made gross purchase of equities worth R39,008 crore and sold shares valued R39,785 crore translating into a net outflow of R777 crore, according to the Sebi data.
?The moment the rating for a country goes down, the interest rate on foreign borrowing goes up. The ECB option would have offered money at around 1-1.5% lower cost. For an airline industry, the debt is over rupee thousands crore and even a half a percentage of change would make major impact,? Amber Dubey, partner (aviation), KPMG, said.
The overseas cheaper funds was seen as a life line for cash strapped domestic airlines facing the brunt of increased interest rates as well as rising jet fuel prices, besides the slowdown in the economy.