 "S&P warns of rating cut if new govt fails to set house in order")
Goldman had upgraded Indian stocks on what it termed as easing of external account pressures and a stable earnings outlook due to possible political change next year.
“The negative outlook indicates that we may lower the rating to speculative grade next year if the government that takes office after the general election does not appear capable of reversing India’s low economic growth… If we believe that its agenda can restore some of India’s lost growth potential, consolidate its fiscal accounts, and permit the conduct of an effective monetary policy, we may revise the outlook to stable. If, however, we see a continued policy drift, we may lower the rating within a year,” S&P said in a statement.
The agency said India’s strengths were counterbalanced by various weaknesses, including an onerous burden on public finances, a lack of progress on structural reforms, and shortfalls in basic services. It said the government was sending mixed signals on subsidy policies by deregulating petrol and diesel but expanding the coverage of food subsidies.
Economic Affairs Secretary Arvind Mayaram said there was nothing to worry as the rating was normal. Financial major Barclays said in a note, “Based on our discussions with market participants, most appear to be taking into account a small but non-negligible possibility of a rating downgrade in the coming months.”
S&P listed four difficult challenges that the new government could face: phasing out diesel subsidies, financing the expansion of food subsidies, addressing other subsidies such as those for fertilisers, and introducing the nationwide rollout of a common goods and services tax. On the fiscal front, it said the fiscal deficit target of 4.8 per cent of GDP in 2013-14 would hinge "partly on the government's resolve on the level of election spending and on the evolution of commodity prices".
Earlier, the agency had said the chances of a credit rating downgrade for India were higher than for Indonesia and there was more than a one-in-three chance of an India rating cut in the next two years. It had cut its outlook on India to 'negative' in April last year. Despite S&P keeping the rating unchanged, the rupee fell further today. The Reserve Bank of India (RBI) intervened in the foreign exchange market to stem rupee depreciation as it weakened to 62.73 per dollar intra-day. The currency ended at 62.42 compared with its previous close of 62.40 per dollar. It weakened due to dollar demand by companies and also because oil companies started buying a proportion of their dollar requirement from the market instead of the special RBI window.
Mayaram said the rupee would stablise in a day or two as demand from state-run oil companies, buying 30-40 per cent of their dollar requirement from the market, would be absorbed. He said strong FCNR flows and export realisation would strengthen the rupee.
Indian stocks ended weak for the third straight day on Thursday. Benchmark indices had risen as much as a per cent during the day because of a rally in IT shares. But the S&P statement triggered selling, resulting in the markets giving up all their gains and ending weak. The Sensex declined 72.17 points or 0.35 per cent to close at 20,822.77, off the day’s high of 21,142.85. The Nifty dropped 27.90 points or 0.45 per cent to end at 6,187.25 after touching 6,288.95 earlier in the day.