S&P says India may lose investment-grade rating

By Swati Bhat

MUMBAI | Mon Jun 11, 2012 4:30pm IST

MUMBAI (Reuters) - Standard & Poor's said on Monday that India could become the first of the BRIC economies to lose its investment-grade status, sending the rupee and stocks lower, less than two months after cutting its rating outlook for the country.

"Slowing GDP growth and political roadblocks to economic policymaking are just some of the factors pushing up the risk that India could lose its investment-grade rating," the ratings agency said in a Monday statement on a report dated June 8.

S&P said the new report, "Will India Be The First BRIC Fallen Angel?", gave further detail as to why India's investment-grade rating could be at risk. The report did not appear to represent a change in view since April.

India's sovereign rating is BBB-, the lowest investment grade rating, and in April S&P lowered its outlook on the rating for Asia's third-largest economy to negative from stable.

Indian stocks fell into negative territory after the S&P statement, while the rupee skidded to as much as 55.82 to the dollar, a near one-week low, from 55.45 earlier.

The benchmark 10-year bond yield rose 2 basis points following the statement release. Traders said the bond markets were affected lesser because offshore investors hold a small share of the market.

"While INR and bonds moved on this S&P headline, it may not have been warranted. While the report is new, the content in itself is probably not," said Kumar Rachapudi, fixed income strategist at Barclays Capital in Singapore.

"The discussion in this report has largely been covered in their previous report when S&P revised outlook in April."

The two analysts who wrote the report could not immediately be reached for comment.

India recently posted annual March quarter GDP growth of 5.3 percent, its weakest in nine years and far below expectations.

"Setbacks or reversals in India's path toward a more liberal economy could hurt its long-term growth prospects and, therefore, its credit quality," said Standard & Poor's credit analyst Joydeep Mukerji.

The so-called BRIC economies consist of Brazil, Russia, India and China. India has the lowest S&P rating of all the BRIC countries, and is the only one with a negative outlook from the rating agency, it said in the report.

"The combination of a weakening political context for further reform, along with economic deceleration, raises the risk that the government may take modest steps backward away from economic liberalization in the event of unexpected economic shocks," Mukerji said in S&P's Monday statement.

The government's inability to push through reforms is widely blamed for yawning current account and fiscal deficits. In addition to slowing growth, India is plagued by persistently high inflation.

"S&P's warning clearly highlights the challenge facing the Indian economy, which has been crippled by the complete dysfunctionality of the government machinery," said Upasna Bharadwaj, economist at ING Vysya Bank in Mumbai.

(Additional reporting by Suvashree Dey Choudhury, Henry Foy and Neha Dasgupta; Writing by Tony Munroe; Editing by Aradhana Aravindan)

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