S&P cuts India outlook from stable to negative

By : |April 25, 2012 0

BANGALORE, INDIA: Standard & Poor’s (S&P) Ratings Services cut India’s outlook to negative from stable, citing slow progress on its fiscal situation as well as deteriorating economic indicators on Wednesday.

It has also revised the outlooks for Infosys Limited, Tata Consultancy Services and Wipro Limited from stable to negative.

In a statement, S&P stated that India’s investment and economic growth had slowed, and hence the revised outlook for the Indian economy to negative, with a rating of BBB(-) from stable.

The ratings agency, however, accorded its ‘BBB+’ long-term corporate credit ratings for the three IT companies. "Our ratings on Indian information technology companies reflect our ‘BBB+’ transfer and convertibility (T&C) assessment of India," S&P stated.

"The outlook revision reflects our view of at least a one-in-three likelihood of a downgrade if the external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow in a weakened political setting," S&P credit analyst Takahira Ogawa said in a note.

It added that it could lower the ratings on these companies, if it revises downward the T&C assessment. "We could lower our T&C assessment, if we downgrade the sovereign credit rating," it said.

On the development, Wipro’s chief financial officer Suresh Senapaty said that it was ‘quite unfortunate’ and that the S&P had responded earlier than required. Terming it as a concern for the country, he said, "Even though there will be investments, the flow of the same may be low."

Meanwhile, India’s fiscal deficit swelled to about 5.9 per cent of GDP in the fiscal year that ended in March, far above the government’s 4.6 per cent target.

Many economists believe New Delhi will have a tough time hitting its target of cutting the deficit this fiscal year to 5.1 per cent of GDP, given a hefty subsidy burden and a weakened government that has failed to push through significant reforms.

The deficit burden is exacerbated by a sharp slowdown in growth, with the Indian economy expanding at just 6.1 per cent in the December quarter, the weakest in nearly three years.

India imports most of its oil and then subsidises fuel to consumers, a double exposure to global energy prices that led to a balance of payments crisis in 1991.

Meanwhile, a series of policy moves, including one that would retroactively tax indirect investments and another that targets tax havens used by foreign portfolio investors, has further soured already-weak investor sentiment.

India’s 10-year bond yield rose 4 basis points to 8.63 per cent soon after the S&P move, while the ailing rupee weakened and stocks fell, although markets recovered some of their losses.

Spreads on Indian bank bonds widened by 5-10 basis points after the outlook revision, with ICICI Bank’s 2020 issue trading at 400 bps above U.S. Treasuries.

"This action should, at least, now push the government into action by announcing new reforms or look to implement the already announced ones. Until then, we will see markets, including the currency, remaining under pressure," said Arun Singh, senior economist at Dun & Bradstreet in Mumbai.

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