Is RBI to be blamed for Fitch rate cut? Experts explain

Many blame the Reserve Bank of India's policy inaction for triggering a Fitch rate cut on India. They feel that there is now a renewed fear that growth will slowdown even more and can have impact on fiscal consolidation.

In an interview to CNBC-TV18, Samiran Chakraborty, Head- Research , Standard Chartered Bank, Standard Chartered Bank, Sajjid Chinoy, Asia Economics, JPMorgan and Gaurav Kapur, Senior Economist at Royal Bank of Scotland discuss if RBI is the reason for it.

Here is an edited transcript of their comments. Also watch the accompanying videos.

Q: This is an extra load coming on the economy and the markets. What have you made of this? Why is Fitch downgrading now?

Chakraborty: My sense is that most of the rating agencies would have in any case been considering such an action. It’s more a question of analyzing the data. My sense is that since RBI had did not cut rates as market was expecting there is now a renewed fear that growth will slowdown even more and can have impact on fiscal consolidation. That could be one of the triggers, but my sense is that it could have in any case come.

Q: What’s your first comment? Does this surprise you? What can be the impact?

Kapur: It doesn’t really surprise. Considering that S&P had already flagged these issues. By and large the same issues were flagged by S&P I think not only once but twice now. The negative outlook definitely is a cause of concern. To the extent it reached to an actual downgrade down the line in say next couple of quarters and I think we only have next couple of quarters to get our act together especially on the fiscal consolidation front.

I think the moment you go down from investment grade to a junk rating or below investment grade there is a certain section of investors who are mandatory to invest under investment grade. You tend to loose out on those investments, however, high your interest maybe. So this is definitely a serious event.

I think this is something that the second rating agency which has kind of put a negative outlook. Other than that I think the very investment grade rating, the factors which are going to determinant it are fairly well known and stable. I think what has really happened is deterioration.

We have seen on the fiscal front combined with the high inflation and now with slowing growth I think all that will test whether we could continue on a path where debt-to-GDP ratio which in fact has been falling and is likely to fall even this year can continue.

This would definitely have a negative impact once the actual event takes place. I think markets have already reacted to it specially the rupee. I think the fact that we move from investment to sub-investment grade itself kind of sends down the wrong signal especially in an environment where global investors are risk averse.

Q: Would any blame lie on the RBI, the rating agency has not mentioned anything about monetary policy and the contrary has expressed worry about investment, about inflation, and growth. Do you think the fact that it is timed to perfection, the fact that the rate cut didn’t come would be a reason at all?

Chinoy: I don’t believe so, I think RBI has absolutely no role to play, it is just coincidental. If anything the decision of RBI today should please rating agencies. Fitch, the rating agency in the past has expressed concern about very elevated rate of inflation and the fact that the central bank has decided to focus squarely on bringing inflation down and leaving the government to some of the heavy lifting on growth and investments should actually calm some of these nerves and not exacerbate them.

Q: What is the impact of another agency moving India into negative outlook, does it worsen things or were things anyways bad and we don’t have fresh problems coming our way?

Chakraborty: Obviously every such rating outlook change put some pressure on the market to react. We are kind of staring at the possibility of an actual rating downgrade if no action is taken quickly. In that sense these are all reminders for policy makers to act.

I hope that these kinds of things would prod the government into taking the right steps because let us accept that both inflation and growth are risks. Let us not try to make a fine distinction between which is the greater risk. Both are risks and both need to be addressed quickly.