S&P may cut India's rating to speculative grade

#1
July 11, 2008

NEW YORK (MarketWatch) -- Standard & Poor's said Friday that it may cut India's credit rating to speculative grade, warning that soaring inflation and worsening fiscal and current account deficits pose challenges for the economy.

India's credit profile has worsened in the past 12 months, but the upside and downside risks to its BBB- rating are currently balanced, said Standard & Poor's credit analyst Takahira Ogawa in a report.

"This assumes, however, that the reasons for credit deterioration are temporary," Ogawa said. "If we conclude that they are longer lasting, India's credit ratings could be lowered again to speculative grade."

S&P raised India's rating to investment grade in January 2007.

One of the main sources of concern for India's government is the surge in global oil and food prices, S&P said. As a major oil importer, India is particularly hard hit by record-high oil prices.

The ratings agency now estimates that India's general government deficit could exceed 9% of GDP in the fiscal year ending next March.

India's current account deficit is likely to reach $35 billion, or 2.5% of GDP, in calendar 2008, higher than the $25 billion, or 2.2% of GDP, in 2007.

The risks posed by rising inflation and rising fiscal deficits are still mitigated by India's deep domestic markets, which allow it to finance large fiscal deficits without recourse to external funds, and by its strong external liquidity, Ogawa said.

The coming months, however, will be critical as national elections approach.
"Failure to respond adequately to negative developments as they arise in this pre-election period could point to a sustained deterioration in macroeconomic stability and thus increase the probability that the government's ratings could be lowered to speculative grade," Ogawa said.

Inflation hits 13-year high

In further bad news on the inflation front, statistics showed Friday that India's wholesale price index-based inflation soared to its highest level in 13 years. WPI shot up to 11.89% year-on-year in the week ended June 28 from 11.63% in the previous week.

The inflation data increased expectations that the Reserve Bank of India will further raise interest rates at a policy meeting later this month. In June, the bank delivered two rate hikes, raising the benchmark interest rate by a total of 75 basis points to 8.5%.

"Inflation pressure from the run-up in global food and energy prices has been further aggravated by the recent weakness in the Indian rupee," said analysts at Action Economics.

"Further rate tightening is anticipated in an effort to restrain inflation," they said.

In Mumbai, the benchmark Sensex stock index fell 3.3% on Friday. It is down 33.6% this year.
 

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