Standard and Poor's (S&P) lowered India's rating outlook to negative and warned of a downgrade in two years if there is no improvement in the fiscal situation and the political climate continues to worsen.
Marc Faber of Market Guru thinks further downgrades will occur. “The situation in India is a situation where the fiscal deficit is essentially very high and obviously the government debt is increasing. The rating agencies do their ratings. I don’t pay much attention to. But obviously although they have a time lag, they probably are in the right direction in terms of downgrading India,” he elaborates.
Below is an edited transcript of his interview on CNBC-TV. Also watch the accompanying video.
Q: What have you made of this change in stance from S&P? Do you think it represents a big negative for India or an affirmation of the situation?
A: I think it was natural that it would happen. I think further downgrades will occur.
Q: At this point, S&P is talking about a one in three possibility of an actual downgrade coming through. What to your mind is the probability of that for India at this point? What usually follows in terms of a change in flows or sharp outflow situation following a potential downgrade?
A: The situation in India is a situation where the fiscal deficit is essentially very high and obviously the government debt is increasing. The rating agencies do their ratings. I don’t pay much attention to that. But obviously although they have a time lag, they probably are in the right direction in terms of downgrading India.
Q: Would you say the second half is going to be more challenging?
A: I think this doesn’t have a large impact on the stock market. Infact it could be actually be mildly positive. But I think the markets position in the world, in other words, stock markets position is not very favourable at the present time. We have many markets that are rolling over.
We have had essentially the S&P making a new high in early April at 1,422. But most of the other markets in the world didn’t exceed the May 2011 highs. So, if you would build an advance/decline line of all stock markets in the world, it would be in a downtrend. And I think that the markets for the next one-two months will be going lower.
Q: You keep a very careful eye on currency markets as well. How have you read the developments over there with particular reference to how much depreciation the Indian rupee has seen and whether on that account you are worried about further weakness?
A: I think that over time the rupee will weaken further. That would be my view now. Whether the weakness comes right away or with some delay, but I think there is a real chance that the rupee will be weak and possibly weaker than investors anticipate. A very weak rupee would be mildly positive for equities. I think they would adjust on the upside because equities are kind of a hedged against the currency devaluation. But in general as I mentioned I think that equity markets are trending lower at the present time.
Q: How much downside risk do you see present for equity markets generally?
A: I think that from the recovery highs, in early May, we could easily see a 20% decline.