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India is at risk of losing its investment grade rating due to slowing GDP growth and political roadblocks to economic policy making, warned S&P.
This warning had its impact on the equity and foreign exchange markets. The benchmark Nifty saw a near vertical fall towards the close of the trading session.
The fall started at 2-35 p.m. with the Nifty at 5104.55 levels and ended the session at 5054.10.
The rupee weakened by 30 paise to close at 55.73 a dollar, down from the previous close of 55.43.
The global credit rating agency said economic growth has slowed in India in recent months, as it has in much of the world, and the country has suffered mild erosion in its economic profile, with widening trade and current account deficits.
In a report titled ‘Will India be the first BRIC fallen angel?' S&P said failure to advance with more liberalisation might reduce India's long-term growth potential and thus hurt its sovereign rating. The combination of a weakening political context for further reform, along with economic deceleration, raises the risk that the government may take modest steps backward away from economic liberalisation in the event of unexpected economic shocks.
“How India's government reacts to potentially slower growth and greater vulnerability to economic shocks may determine, in large part, whether the country can maintain its investment-grade rating, or become the first “fallen angel” among the BRIC nations,” said the agency.
The BRIC nations are: Brazil, Russia, India and China. Among the four countries, India currently has the lowest credit rating and is the only one with a negative outlook. In April, S&P affirmed India's ‘BBB-' long-term sovereign credit rating, but revised the outlook on the rating to negative from stable.
The outlook revision reflected at least a one-in-three chance of a downgrade in the next two years if India's external position continues to deteriorate, its GDP growth prospects diminish, or if progress on fiscal reforms remains slow.
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