Interest rate hikes are a risk to India

Global rating agency, Standard & Poor's (S&P) expects incremental reforms to allow India to grow at close to 8%, but sees the country with fiscal weakness vulnerable to any secular decline in growth rates or an increase in interest rates.

"The key event that could mar the largely benign picture is an oil-supply
shock. In this scenario, both high oil prices and interest rates would
simply reflect severe supply constraints, and economic growth would
definitely suffer," S&P said in a research report titled "Credit Quality Of
Asia-Pacific Sovereigns Proves Robust So Far In 2006".

Interest rates in India are on the rise since January 2006 with banks having
increased their lending rates for both corporate and retail by as much as 3%.

The government is expected to increase retail prices of petrol and
diesel later this month or early January. It had to issue bonds to
state-owned oil marketing companies to fiscalise losses suffered by them for not having passed on the increase in global oil prices to consumers.

The rise of oil prices to current levels has had limited impact on sovereign
credit quality in the region. Continued growth of exports to the US has
helped Asian economies to maintain healthy growth despite higher energy
costs.

S&P said going forward, tightening monetary policy - in response to rising
inflation - could rein in growth somewhat, though the general appreciation
of the region's currencies against those of major trading partners should
temper the need for further interest rate hikes.