>ECONOMY: S&P raises red flag

S&P has maintained India’s sovereign rating at BBB‐ but the outlook has been revised downward to ‘negative’. This action is based on factors that are already widely known. Importantly, at this stage it is just an outlook change and not a ratings downgrade. To that
extent, it is more of a warning of increasing vulnerabilities of the country. Nonetheless, the action can impact INR in the near term, which is already under pressure and perhaps raise external borrowing costs for some of the corporate. However, the silver lining could be that this action could exert pressure on the government to act on fiscal front (possibly by raising the diesel prices etc) as well as on policy front.


S&P Action: Ratings reaffirmed; outlook downgraded
S&P has revised its outlook on India from ‘stable’ to ‘negative’ while re‐affirming the
rating of BBB‐, (just one notch above speculative grade). The ‘negative’ outlook reflects 1/3rd chance of ratings downgrade over next 24 months.


The key reason for the action is the worsening macro situation, particularly the widening CAD, investment slowdown and high fiscal deficit.


What can trigger ratings downgrade?
• External situation worsens
• Growth prospects diminish
• Progress on fiscal remains slow


On the other hand, the ratings can improve if government implements initiatives to reduce structural fiscal deficits such as fuel price hikes, early implementation of the goods and service tax etc.


Our view: A timely warning
Overall, the outlook downgrade is based on the factors that are already widely known. Importantly, at this stage it is just an outlook change and not a ratings downgrade. To that extent, it is more of a warning of increasing vulnerabilities of the country. Nonetheless, the S&P action would add to the overhangs on the Indian economy. At the margin, the S&P action can have an impact on INR in the near‐term, which is already under pressure and perhaps raise external borrowing costs for some of the corporates. The silver lining could be that it will exert added pressure on the government to act on fiscal front (possibly by raising the diesel prices etc) as well as on policy front.


RISH TRADER