Not surprised by S&P's negative outlook on India: StanChart

However, she feels that though its initial impact on the rupee was muted, but in the coming days it will hurt the portfolio flows. Given this, the presssure on the rupee with continuw.

"The situation wasn’t particularly surprising, but in terms of what we can expect for rates, we think that the outlook downgrade will dampen the interest in local currency debt, which has already weakened on other related uncertainties," she added.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: We saw S&P change their outlook on the India rating to negative, but just five days back we have a moody’s report dated April 20 saying that they reaffirm the positive outlook to India’s investment grade rating, any thoughts if there are these rival positions, would the impact on the markets be nil?

A: The ratings agency clearly indicated fiscal deficit and debt burden as triggers behind their move and there is some skepticism over efforts to cut the current account deficit. In our view, the downgrade doesn’t come as a complete surprise and the initial INR reaction was muted, but there will be an impact on portfolio flows over the coming days.

So, the pressure on INR is going to be sustained. The situation wasn’t particularly surprising, but in terms of what we can expect for rates, we think that the outlook downgrade will dampen the interest in local currency debt, which has already weakened on other related uncertainties.

Q: We had a rebound in Europe yesterday, clearly the Dutch bond auction going through and also some of the data in the US not too bad. Do What the next trigger you are watching out for in Europe?

A: We are really focusing on May 6, although its week and a half away we have several political events that day. We have the second round of the French presidential elections, Greek elections, Italian municipal elections and one of the German state elections.

So, we think that the focus is going to be very much on the politics in the euro area given that the Dutch example and the example from the Netherlands shows that populations and voters are becoming frustrated with the extent of austerity, which is being imposed.

Later this week we have the Italian auction. So, in terms of assessing what the investor mood is on Italy, those are going to be significant as well and tomorrow we have the European commissions sentiment indicators which are usually quite good and advance warning of what the economic data are going to turn out to be for the months ahead.

Q: We have also the US FOMC announcing its final statement at the end of the two day meet, what are you looking forward to and how might they impact for instance the euro-dollar?

A: I feel that we will see similar sort of statements to what we have seen previously. The FOMC has tended to talk about the moderate growth continued for the gradual decline in unemployment and so we think that we will see the conditional commitment to keep rates on hold until at least the end of the 2014 period. We think that they will stay firm on that commitment.

We may see a little bit more caution on the labour market given the weak payroll and the pickup in initial jobless claims since the last meeting in March. But, we think that this is unlikely to be anything more than tweaking of growth and inflation forecast. Interesting as well will be to hear what the Fed Chairman, Ben Bernanke says, he will be holding press conference after tonight’s policy statement release.

Q: Anything in the horizon to think that risk appetite could return probably after the new French premier settles in if there is a new one after the elections. Is that on your radar at all, the return of the kind of risk appetite we saw earlier this year?

A: It is certainly possible. We think that the Hollande presidency which looks pretty much assured now is not perhaps going to be quite as perhaps the markets and investors seem to fear. We think that he will be pragmatic, he will work alongside Germany rather than in opposition to Germany and he is really sort of tide into making budget cuts, otherwise the ratings agencies will take a sense. So, we could see some improved risk appetite once those elections are out of the way. I do have to warn that there are several upcoming stresses in the euro area still. So, our view would be to remain cautious.