S&P maintains ‘Negative’ outlook on India

Global rating agency Standard & Poor's on Tuesday said it would maintain 'Negative' outlook on India's BBB sovereign credit ratings.

The capital outflows and depreciating rupee, which has touched 64 against a dollar, indicate the weakening investor confidence in India.

'BBB-' is considered the lowest investment grade and a downgrade would mean pushing the country's sovereign rating to junk status, making overseas borrowings by corporates costlier.

Moreover, if the uncertainty continues, business financing conditions could deteriorate further and investment growth could slow down further.

The Reserve Bank of India and the government had, on 14 August, announced stern measures to control the rupee downfall, including curbs on Indian firms investing abroad and on outward remittances by resident Indians.

S&P's comments come when the rupee touched the record low of 64.11 to a dollar in intra-day trade on Monday. Moody's Investor's Service in its report said the depreciating rupee is likely to inflate the fuel subsidy bill, weaken the credit quality of oil companies and put pressure on the economy.

S&P is the only agency which has a 'Negative' outlook while Moody's Investor's Service and Fitch Ratings have a stable outlook on India; however, Moody's in its report yesterday said the depreciating rupee is likely to inflate the fuel subsidy bill, weaken the credit quality of oil companies and put pressure on the fiscal deficit.

According to S&P, the higher capital requirement under Basel III will raise the pressure on Indian banks to raise capital and could thus lead to some changes in the industry.(See: Indian banks will need Rs2.6 trillion to meet Basel III requirements: S&P)

And, as a result of the softer than anticipated traction, S&P has lowered slightly its base case forecasts of 2013 real GDP growth for some countries like China, Hong Kong, India, Japan, South Korea, Singapore, Thailand and Vietnam. (See: S&P cuts GDPforecasts for China, India, Japan, S Korea)

In October last year, S&P said India faced a one-in-three chance of a credit rating downgrade despite policy changes to allow more foreign investments. (See: India still faces risk of negative rating: S&P news)