Leading credit rating agency Standard & Poor?s (S&P) is keeping a close watch on India?s fiscal and monetary trends to take a decision on whether to review the country?s sovereign rating.
In an exclusive interaction with with FE, Takahira Ogawa, director, sovereign & international public finance, S&P noted that with the impact of measures like farm debt waiver, high oil and fertiliser subsidy and the implementation of the Sixth Pay Commission recommendation, during the fiscal year can further add inflationary pressures which are caused by the external developments and worsen the country?s fiscal situations.
?India?s credit profile has worsened in the past twelve months but we believe the upside and downside risks to its ?BBB-? rating are currently balanced,? said Ogawa.
?This assumes, however, that the reasons for credit deterioration are temporary. If we conclude that they are longer lasting, India?s credit ratings could be lowered again to speculative grade,? he said.
?We expect inflation to touch 9-10% by March 2009. We will have to take a look at the effectiveness of the monetary measures used by the central bank. However, there is a possibility that the RBI would further tighten its policy rates during the year in a bid to control growing inflation,? he said.
Wholesale price index (WPI) exceeded 12% in the latest count, highest in 13 years.
Ogawa also noted that there would be a slowdown in growth. He expected a growth of 7.8% for this fiscal year.
Talking about the pipeline of $700 billion-$750 billion investments in the corporate domain, Ogawa said that there is a possibility of the corporate funding deteriorating.
He also pointed out that India will have to concentrate heavily on making investments in the infrastructure sector which is lagging behind, to help accelerate growth.
?The current downward risks in India are still mitigated by the collection of larger revenues, deep domestic markets, which allow it to finance large fiscal deficits without recourse to external funds, and by its strong external liquidity,? he said.
According to him the capital inflow in terms of direct inflow has been stable whereas portfolio investment has been fluctuating.
Failure to respond adequately to negative developments as they arise in this pre-election period could point to a sustained deterioration in macroeconomic stability and thus increase the probability that the government?s ratings could be lowered.