What happens if rating agencies downgrade India?

S&P on Friday threatened to downgrade India's sovereign rating to ‘junk' status if the government failed to keep the momentum going on reforms and containment of the twin deficits. Earlier, Fitch had also maintained a cautious outlook on India. Also read Role of Credit Rating Agencies. How do they rate countries?

What happens if S&P, Moody's or Fitch downgrade India?

S&P has accorded India with a ‘BBB-' with a ‘negative' outlook. A downgrade below this means that India's sovereign rating would go down to junk status. In simple terms, the rating agencies if they downgrade India to junk status are telling investors that there is an element of risk if you invest in Indian companies and in India.

What would happen then is that since there is an element of risk, investors investing in India would start charging higher interest rates for taking a risk. This also means that borrowing costs for Indian companies would be higher.

Not only that, certain foreign investors are mandated not to invest in countries with a junk rating status. This could mean that there could be withdrawal of money by foreign institutional investor or various other foreign entities.

This will most likely have an effect on the currency markets and the rupee could drop. Not to mention the fact that the stock market could come crashing down with a rapid erosion in shareholder wealth. All the above outcomes are just hypothetical, unless there is a downgrade.

What is S&P saying?

On Friday S&P warned of a down grade. ""We may lower the rating if we conclude that slower government reforms than we currently expect would not lead economic growth to recover to levels experienced earlier this decade...India's long-term growth prospects, underpinned by its favourable demographic profile and its high foreign exchange reserves, support the ratings. The country's large fiscal deficits and debt, as well as its lower middle-income economy, constrain the ratings," it said.

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