Bloomberg News

S&P Says India May Be First in BRIC to Lose Investment Grade

June 11, 2012

S&P Says India May Be First BRIC Nation to Lose Investment Grade

Indian gross domestic product rose 5.3 percent last quarter from a year earlier, the weakest pace in nine years. Photographer: Brent Lewin/Bloomberg

India may become the first BRIC nation to lose its investment-grade credit rating, Standard & Poor’s said, citing slowing growth and political roadblocks to economic policy making. The rupee weakened and stocks fell.

“Setbacks or reversals in India’s path toward a more liberal economy could hurt its long-term growth prospects and, therefore, its credit quality,” Joydeep Mukherji, an analyst at Standard & Poor’s in New York, said in a statement today. India is rated BBB- by S&P, one level above junk and the lowest in the BRIC group, which also includes Brazil, Russia and China.

Indian gross domestic product rose 5.3 percent last quarter from a year earlier, the least in nine years, stoking concern the nation’s economic prospects have deteriorated as policy gridlock deters investment and Europe’s debt crisis crimps exports. S&P lowered India’s credit outlook to negative from stable in April, contrasting with ratings upgrades in Asian nations from Indonesia to the Philippines in recent months.

“It’s another warning signal reflecting weakening growth fundamentals, and if it happens it may have a negative impact on inflows,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. “The government urgently needs to take steps to reverse this negative spiral.”

The rupee fell 0.5 percent to 55.73 per dollar at the local time close, while the BSE India Sensitive Index ended down 0.3 percent. The currency has slumped 20 percent in the past year. The yield on the 8.79 percent note due November 2021 declined three basis points, or 0.03 percentage point, to 8.33 percent.

Downgrade Scenario

“Fiscal slippage, combined with persistently high inflation, could further weaken investor confidence,” S&P said in a linked report. “Both the government’s debt burden and fiscal flexibility could continue to erode, in step with rising external vulnerability because of higher trade and current account deficits. India’s credit quality would suffer under such a scenario, and a downgrade could result.”

Prime Minister Manmohan Singh’s government is facing one of its most challenging periods since taking office in 2004. The administration is grappling with a trade deficit that reached a record $184.9 billion in the fiscal year ended March, the widest BRIC budget shortfall and an inflation rate of more than 7 percent.

The prime minister defended India’s record last month, saying its gross domestic product rose at one of the fastest paces in the world last financial year.

Singh’s Vow

On June 6, he vowed to revitalize growth as he outlined projects including new ports, roads and power plants and urged officials to bridge differences impeding progress. GDP climbed 6.5 percent in 2011-2012.

“If the rating agencies start downgrading India at 6 percent GDP growth then you start wondering what the ratings of the euro nations and the U.S. should be,” said Krishnamurthy Harihar, a Mumbai-based treasurer at FirstRand Ltd. (FSR)

“Despite its recent problems, the Indian economy remains in much better shape to muddle through the current period of heightened global uncertainty than it was earlier, especially in the early 1990s, when it suffered a balance-of-payments crisis,” S&P said. The nation’s $250 billion in foreign- exchange reserves and a floating exchange rate give “scope for adjusting to external shocks,” it said.

India is taking all necessary steps to boost economic expansion, Finance Minister Pranab Mukherjee said in New Delhi today. He pledged in March to narrow the fiscal deficit to 5.1 percent of GDP in 2012-2013 from about 5.9 percent in the last fiscal year.

Rate Signal

The economic slowdown and an oil-price drop suggest more room for another interest-rate cut even as inflation risks remain, Reserve Bank of India Deputy Governor Subir Gokarn said on June 1. The monetary authority lowered borrowing costs to 8 percent from 8.5 percent on April 17. The majority of economists in a Bloomberg News survey expect another reduction on June 18.

S&P’s long-term foreign-currency rating for China is AA-, with Brazil and Russia both at BBB, according to data compiled by Bloomberg. The company’s long-term local currency rating is at AA- for China, A- for Brazil and BBB+ for Russia.

Ratings changes aren’t necessarily accompanied by corresponding moves in bond prices. Instead of falling in value after S&P stripped the U.S. of the top AAA sovereign rating, Treasuries rallied and the U.S. government’s borrowing costs fell to record lows.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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