S&P warning to India on negative rating

Even as there is no immediate threat of downward tweaking, global rating agency Standard & Poor's (S&P) on February 06 cautioned India that its sovereign credit rating could tilt slightly towards ‘negative' if effective action was not taken to counter “the balance of risk factors” emanating from economic uncertainties at home and abroad.

In its report titled ‘Several factors could weigh on India's current stable sovereign rating in 2012', S&P Ratings Services pointed out that even though it did not expect to downgrade or revise the ‘stable' outlook on India's investment grade ('BBB-') long-term sovereign credit rating in the near future, there were some concerns as the country is battling with high inflation, weak government fiscal position, slow domestic economic growth and the euro zone sovereign debt crisis which could impact the economy.

“Like many countries, India is facing some challenges on a few fronts, and the balance of risk factors for the sovereign credit rating may be shifting slightly toward the negative … S&P doesn't expect to downgrade or revise the outlook on the long-term rating in the near future,” the S&P report authored by its credit analyst Takahira Ogawa said.

According to Mr. Ogawa, India has been “grappling with a political gridlock” and the government's ability to implement measures to “improve economic growth and fiscal prudence will be vital” to boosting confidence. “However, the negative factors, combined with the government's weak policy formulation and implementation, may lead us to a tipping point,” the S&P credit analyst said.

As per the report, high inflation, a weak fiscal position and slower economic growth have hurt investor confidence in the rupee which triggered a capital outflow and all these negatives weighed on the stable sovereign outlook on India in 2012. “Our stable outlook on the 'BBB-' long-term rating on India currently reflects our expectation of strong economic growth in the medium term and gradually improving fiscal performances,” Mr. Ogawa said while noting that the rating agency has already “factored in inflation and political uncertainty, which may lead to higher government subsidies and stalled reform efforts."