S&P maintains negative outlook on India's rating
Investor's Service said the falling rupee is likely to inflate the fuel subsidy bill, weaken the credit quality of oil firms and put pressure on the fiscal deficit
Amid rupee sliding below 64 to a dollar, global agency Standard & Poor's said it will maintain negative outlook for the country as currency depreciation is adversely impacting investor confidence, reports PTI. "We view the capital outflows and depreciating rupee as an indication of weakening investor confidence in India ... We maintain a negative outlook on India's BBB- sovereign credit ratings," S&P Senior Director Sovereign and International Public Finance Ratings (Asia-Pacific) Kim Eng Tan said in an emailed statement. 'BBB-' is the lowest investment grade and a downgrade would mean pushing the country's sovereign rating to junk status, making overseas borrowings by corporates costlier. Referring to the recent measures announced by the government to restrict capital outflow, Tan said these "have also increased uncertainties among investors both foreign and domestic". "If the uncertainty continues, business financing conditions could deteriorate further and investment growth could slow further". In order to tame the sliding Rupee, the Reserve Bank and the government had on August 14 unveiled stern measures, including curbs on Indian firms investing abroad and on outward remittances by resident Indians.
S&P's comments came on a day when the rupee touched a record low of 64.11 to a dollar in intra-day trade on Tuesday.
Earlier in May, S&P had warned that it may downgrade India's sovereign rating to junk grade if the government fails to pursue reforms and check deterioration in fiscal and current account deficits.
S&P said its future credit rating action would depend upon the response of policymakers to the latest economic developments.
It added that investments continue to be stifled by inadequate infrastructure, rigidities in labour and product markets, and red tape, among other issues.
A sliding rupee, mainly on account of widening Current Account Deficit (CAD), will make imports costlier and fuel subsidy bill. CAD touched a record high of $88.2 billion or 4.8 % of GDP in 2012-13 fiscal.
In its report, Moody's said despite previous price liberalisation in the petroleum sector, the subsidy bill is likely to rise due to depreciation, thus widening the government's deficit, which is also under pressure from slower revenue growth. "We believe the currency will remain under pressure until the current account deficit narrows meaningfully, or capital inflows accelerate due to an improving growth outlook," Moody's said.
However, it said the bleeding rupee, the twin deficits and weaker growth are already factored in the current Baa3 sovereign rating, and thus do not accentuate already weak fundamentals of the country.