Yesterday in a surprise move Standard & Poor cut its outlook on India’s long-term debt from stable to negative stating high fiscal deficit, widening current account deficit and growth slow down.
The agency has further threatened that it would downgrade the ratings further if the economic conditions don’t improve.
Immediately after the announcement Sensex tumbled about 100 odd points.
India’s trade deficit ballooned to $185 billion in the fiscal year, a 56% jump over the previous year, as oil and gold prices shot up. The current-account deficit—the difference between total exports and imports of goods and services—is about 4% of GDP, Indian officials say. That is pressuring the rupee, which fell 18% against the dollar in the past year. (source)
The government, however, said there was no cause for panic. There is no need for panic. The situation may be difficult, but we will be surely able to overcome (it),” finance minister Pranab Mukherjee told reporters after S&P’s announcement. (source)
According to S&P credit analyst Takahira Ogawa, “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.”
Other BRIC nations have a better credit ratings compared to India. China has AA-, Russia & Brazil have a BBB rating. This might keep FII’s inflow away from India for some more time.