S&P revises India outlook to negative from stable

Ratings agency Standard & Poor's on Wednesday cut India's outlook to negative from stable, citing its large fiscal deficit and expectations of only modest progress on reforms given political constraints, battering stocks, bonds and the rupee.

The lowered outlook jeopardises India's long-term rating of BBB-, which is the lowest investment grade rating.

"The outlook revision reflects our view of at least a one-in-three likelihood of a downgrade if the external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow in a weakened political setting," S&P credit analyst Takahira Ogawa said in a note. India's 10-year bond yield rose 4 basis points to 8.63 per cent, while the rupee weakened to 52.64 against the dollar from 52.48 before the action. Stocks were also hit, with the main BSE index down 0.9 per cent. India's fiscal deficit swelled to an expected 5.9 per cent of GDP in the fiscal year that ended in March, far above the government's 4.6 per cent target. Many economists believe New Delhi will have a tough time hitting its target of cutting the deficit in the current fiscal year to 5.1 per cent of GDP, given a hefty subsidy burden and a weakened government that has failed to push through significant reforms. The general elections looming in 2014 are expected to limit the prospects for significant reforms that would improve the investment climate and India's fiscal position. "The writing was on the wall given the country's weakening debt profile and sluggish investment climate," said Radhika Rao, economist at Forecast Pte in Singapore. With the coveted investment grade now at risk, one can only hope this acts as a wake-up call for the government," she said. Moody's has a Baa3 rating on India, while Fitch rates India BBB-. Both are also the minimum investment grade ratings. Moody's in December issued a stable outlook for India.

Five big facts about S&P’s India outlook

1. Standard & Poor has revised India’s outlook to negative. This is not the same as the sovereign credit rating. The agency has reaffirmed sovereign credit rating at investment grade (BBB-) but suggested that the probability of a downgrade in the sovereign rating is now higher than before. S&P has revised the outlook to negative from stable. The outlook is a lead indicator for a credit rating. India currently enjoys a stable rating of BBB- on the sovereign debt. Borrowing is cheapest for ‘AAA’-rated countries like Germany. S&P hit the headlines earlier this year for downgrading the United States’ credit rating for the first time ever to below AAA.

2. Indian stock markets fell on news of the negative outlook. The Sensex slipped nearly 200 points to 17,019 while the broader Nifty index slumped over 60 points to 5,160. A lower sovereign rating will make money dearer for Indian corporates, particularly in foreign currencies. State-run companies will be the hardest hit, since their finances are more directly linked to the government.

3. India’s risk factors included high inflation, a weak government fiscal position, and a slower rate of economic growth. “High fiscal deficits and a heavy debt burden remain the most significant constraints on the sovereign ratings on India. We expect only modest progress in fiscal and public sector reforms, given the political cycle--with the next elections to be held by May 2014--and the current political gridlock,” S&P said in its statement.

4. The agency sees little progress on economic reforms that could help control fiscal deficit. S&P is not confident about the government achieving control over fiscal deficit. The fiscal deficit – or the difference between the government receipts and spending – is expected to be 5.1 per cent of the gross domestic product or GDP for the year ended 2012-13. S&P does not think these targets could be achieved.

5. Finance minister Pranab Mukherjee was quick to react and say that the government would achieve budget targets. India is likely to pass some financial reforms in the current session of Parliament, which started on Monday, he added. "There is no need for panic," Mukherjee told reporters. "The situation may be difficult, but we will be surely able to overcome (it)."