S&P lifts India outlook; inflation, rates in focus

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Standard & Poor's lifted its outlook on India to stable from negative on Thursday, citing an improving fiscal position and strong economic growth but warned on inflation, boosting stock and bond prices.

A deputy governor at the Reserve Bank of India said the central bank was open to taking policy action ahead of its April 20 policy review. With headline inflation nearing 10%, the RBI is under increasing pressure to raise interest rates for the first time since the global downturn.

Earlier, the government reported food inflation eased for the second straight week in early March but fuel inflation rose.

In affirming its BBB- long-term and A-3 short term credit ratings on India, S&P said ratings remained constrained by a high debt burden and deficit, and said inflation is a worry.

"In our opinion, the recent high inflation rate could also derail the stable macroeconomic and interest rate environments," S&P credit analyst Takahira Ogawa said in a statement.

On Monday, India reported headline wholesale price index (WPI) inflation of 9.89% for February.

Analysts said WPI would reach double digits by March before retreating over the next few months, but a pick-up in economic growth would keep inflation high for the rest of the year.

India's 10-year bond yield fell 4 basis points after S&P raised the ratings outlook, while the 5-year swap rate shed 3 basis points. The 30-share BSE index ended up 0.2% on a late surge.

The partially convertible rupee was little changed.

S&P's outlook on India is now in line with Moody's and Fitch.

"The stable outlook reflects our view that India's fiscal consolidation at the central, state, and public enterprise levels over the next several years will likely restore the government's policy flexibility," S&P said.