S&P threat ends; Fitch begins by changing India's credit outlook

Business

oi-Sunil

By Sunil Fernandes

Published: Tuesday, June 19, 2012, 14:36 [IST]

Close on the heels of S&P revising India's credit outlook to negative and threatening a downgrade, Fitch Ratings has now decided to follow S&P by cutting India's credit outlook to negative.

The global rating agency confirmed India's country rating to BBB-, the lowest investment grade.

The agency has said that any significant loosening of fiscal policy that leads to an increase in the gross general government debt/GDP ratio would result in a downgrade of India's sovereign rating.

India faces an "awkward combination" of slow growth and elevated inflation, Fitch said, adding the country "also faces structural challenges surrounding its investment climate in the form of corruption and inadequate economic reforms" .

Earlier this month S&P said India could become the first BRIC nation to lose its investment-grade credit rating, citing slowing growth and political roadblocks to economic policy making. India is currently rated BBB- for its ability to pay long-term loans, just a notch above speculative grade. The rating of Brazil & Russia - BBB - is one notch above India while China is AA-, six notches above India.

What a downgrade does

A rating downgrade makes funds costlier for Indian companies accessing money abroad. Also, if ratings are downgraded investment in the country becomes riskier for foreign investors, who could pull out money. It could also reduce fresh inflows, through FDI or portfolio, adding to pressure on the currency.

At the present moment, when there is a tendency towards risk aversion a flight of capital from India could have damaging consequences.

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