The Hindu Business Line : India’s rating may be downgraded, says S&P

Pressure points
Risks like fiscal deficit, high inflation are mitigated by deep domestic markets
Subsidies to oil cos, loan waiver may put pressure on fiscal position
RBI may hike policy rates again

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Mumbai, July 11 India’s sovereign credit ratings are under threat from factors such as rising fiscal deficit, rising inflation and widening current account deficits, said international rating agency Standard and Poor’s.

If these reasons last long, the ratings on India could be lowered to speculative grade, from the current stable grade, said a report issued by S&P.

The country’s credit profile has worsened in the past 12 months, but the upside and downside risks to its ‘BBB’ rating are currently balanced.

According to the report, risks like increasing fiscal deficit, high inflation and widening current account deficit are mitigated by India’s deep domestic markets, which allow it to finance large fiscal deficits without recourse to external funds, and by its strong external liquidity.

Subsidies to oil companies in the form of the Rs 94,600-crore worth oil bonds, the decision to waive farm loans worth Rs 71,000 crore, the 10-27 per cent reduction in the prices of complex fertilisers, and the increased outgo in case the Sixth Pay Commission’s recommendations are implemented are the reasons that will put pressure on the country’s fiscal position.

Inflation challenge

Inflation, which is at a 13-year high, is a key challenge and there is a likelihood that Reserve Bank of India may hike policy rates again, the report said. This may push up bond yields, and consequently, the Government’s cost of funding would also increase, as the public sector is the largest borrower in the domestic bond market.

India’s current account is likely to reach $35 billion in the calendar 2008, higher than $25 billion in 2007, mainly due to higher oil prices and still-strong demand for external goods and services.

There is a possibility that the lowering of the sovereign rating may impact the ability of corporates to raise funds overseas. In any case, with the restrictions imposed on the RBI, there has been a slowdown in the overseas commercial borrowing.

According to RBI data, corporates had raised about $1.16 billion through ECBs and Foreign Currency Convertible Bonds in April and about $1.27 billion in May. As against this, in March the total overseas borrowing was nearly $4.47 billion.