The sovereign ratings outlook for India may turn negative, from stable currently, if the country's fiscal policy fails to check external shocks like crude prices or aggravates the inflation concerns, global rating agency Moody's warned today.
Moody's warning comes within weeks of another global agency Fitch downgrading India's foreign currency credit outlook from 'stable' to 'negative'.
"If the fiscal policy response remained inadequate amidst heightened external shocks or resulted in an intensification of domestic inflation, then ratings pressure for a change in India's sovereign ratings outlook -from 'stable' to 'negative' - would increase," a Moody's report said.
Less than a week after the Reserve Bank hiked the key policy rate, followed by the commercial banks increasing the retail interest rates by up to 100 basis points, Moody's today said there was possibility of further rise in borrowing cost.
"Policy as well as market interest rates could rise, and a sharp deceleration in growth may follow," it said.
The report cautioned that higher oil prices and the lack of fiscal policy reactions amidst high pent-up price pressures are putting the burden of macroeconomic adjustment on the monetary authorities.
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The agency said, the risks confronting India's economy have grown, but not yet to the extent that the government's Baa3 foreign currency and Ba2 local currency ratings are "threatened". The Baa3 denotes investment grade while Ba2 relating to local currency reflects non-investment grade.
The downgrading from stable to negative makes debts raising costly in the international market.
With inflation hovering around 12 per cent and elections due in less than year's time "the outlook for reforms remains uncertain, it said.