The Hindu Business Line : Negative vibes

India may not quite be the basket case that a rating downgrade may imply, yet it is difficult to ignore the negatives surrounding the management of the economy.

Viewed purely from the perspective of its impact on the financial markets it is safe to say that the decision by international rating agency Fitch to change the rating outlook for investments in rupee-denominated instruments from ‘stable’ to ‘negative’ is insignificant. The bulk of the subscriptions for such instruments originates from banks, insurance companies and provident funds. As long as they are mandated by law to plough varying percentages of their investible funds into these securities, the yields may not quite impound signals emanating from rating agencies. Foreign institutional investors (FIIs) may have, of late, had greater appetite for investments in government securities. Even so, with around Rs 20,000 crore in cumulative net investments in such paper, they are still not a force to reckon with in this market when seen against the annual addition of nearly Rs 1,50,000 crore to the pool of marketable securities issued by the Government.

If the current negative outlook culminates in an actual downgrade by a rating agency, however, some FIIs may have to pull out from the equity market as their charter might not allow them to stay invested in economies that do not enjoy investment rating. That may put added pressure on the equity market, which is already witnessing sell-offs by these institutions. The rating agencies’ recommendations are, however, not as much about near-term implications for interest rates in the economy as about sounding a note of caution on the state of affairs. The signals are aplenty: Inflation at 11.9 per cent is nowhere near the level the RBI had indicated it is comfortable with. High inflation adds to public misery and is a disincentive for savings and capital formation in the economy. The prospect of double-digit growth, which seemed within grasp, has receded into the background.

On the political front, with the Government’s survival dependent on winning over independents and single-member parties in the ensuing ‘confidence vote’ in the Lok Sabha, it is increasingly seen as appeasing special interest groups to win their support, throwing prudent fiscal management principles to the winds. The decisiveness in administration so essential for removing supply-side bottlenecks that are pushing up prices and holding the economy back from realising its full potential is nowhere in sight. India may not quite be the basket case that a rating downgrade may imply, yet it is difficult to ignore the negatives surrounding the management of the economy. The nation had better get used to the prospect of more negative views emanating from the international rating agencies in the future.

Related Stories:
Fitch downgrades local currency outlook
S&P upgrades India currency rating outlook

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