Fitch downgrades India !!!

Fitch lowering India's long-term local currency outlook from stable to negative is the summation of today's post.

Fitch has lowered the India's long-term local currency outlook from stable to negative. However, Fitch has retained sovereign rating and the local and foreign currency rating at BBB-, with a stable outlook on the foreign currency borrowing.

Implications: A change in the outlook on the local-currency rating implies that there is higher risk for investors in rupee-denominated securities. This move could make overseas borrowings by Indian companies more expensive and the negative outlook could also affect investment in India.

Though the revision does not have a direct impact on corporate borrowings, the situation could change if other rating agencies too revise ratings. The flood of money which came in following a spate of positive reviews on ratings, which are at investment grade now, could see a reverse flow. For Indian companies, cost of borrowing from overseas markets has already gone up. A downgrade in the foreign currency rating could increase the spreads for Indian corporates. The prime driver of the rating downgrade is the concern over fiscal slippages on account of rising subsidies, interest payments and the Sixth Pay Commission-stipulated wage hike for government employees.

Pre-cursor: Fitch's warning comes after another international rating agency Standard and Poor's had also warned last Friday of an adverse impact on India's sovereign rating due to rising deficit and inflation and a widening current account deficit. India's long-term local currency debt is rated BBB- the lowest investment grade, by S&P.

The rating may be reduced to 'speculative grade' if steep inflation and higher government spending ahead of next year's election impair the budgetary deficit. A one-notch drop in its ranking would place Asia's third-largest economy on par with Indonesia, El Salvador and Guatemala. Although India's ratings were lifted to the investment grade last year for the first time since 2002, the same has been instrumental in allowing Indian corporates seek cheaper funds overseas for their expansion plans and funding inorganic growth.

A lower rating may deter foreign investors and make it more expensive for Indian companies to raise money, slowing growth in the US$ 912 bn economy. So, Whats next ? We will have to wait and watch and my expectation is that current scenario will continue for few more quarters and will have to live with liquidity squeeze, higher inflation,higher gold prices and higher input prices across all industries and not to forget the house holds trekking their monthly budgets on a tight rope walk !!!! Amen.......



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