Apr 26, 2012 01:14 PM IST | Source: CNBC-TV18

S&P lowers India outlook to negative from stable

Citing a slowdown in investment and economic growth which has widened the current account deficit, S&P revised its outlook on India to negative. It affirmed BBB- rating for India. It also warned one out of three chance of a downgrade if external positions worsen.

Moneycontrol Bureau

Citing a slowdown in investment & economic growth and a widening current account deficit, Standard and Poor's (S&P) Rating Services on Wednesday revised India's long-term rating to negative from stable. It affirmed `BBB-' rating for India and warned that the country stands one out of three chance of a downgrade in two years if external positions worsen.

In a press statement, the agency said India's favorable long-term growth prospects and high level of foreign exchange reserves support the ratings. On the other hand, India's large fiscal deficits and debt, as well as its lower middle-income economy, constrain the ratings.

"We expect India's real GDP per capita growth will likely remain moderately strong at 5.3% in the current fiscal year ending March 31, 2013, compared with about 6% on average over the prior five years, but down from 8% in the middle of the last decade," said Standard & Poor's credit analyst Takahira Ogawa.

In a sharp contrast to S&P's move, Moody's last week had said its long term outlook on India remains stable.  But S&P said the government will face headwinds in implementing policy reforms. Stressing that high fiscal deficits and a heavy debt burden remain the most significant constraints on the sovereign ratings on India, the rating agency said it sees only a modest fiscal and public sector reforms given the current political gridlock.

This news sent shock waves in market, sending Sensex down by more than 150 points. The rupee reacted by moving to 52.65 to a dollar. Discounting the slides as a knee-jerk reaction, experts told CNBC-TV18 that market will stabilise.

No sooner had the news spread, the finance ministry activated its damage-control machinery saying the S&P has only waved a red flag and not downgraded India which will not impact the ability of corporates to borrow abroad. While this might soothe ruffled feathers of worried investors, experts point out that unless the government delivers on reforms, a downgrade is imminent.

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