International rating agency Standard & Poor's (S&P) move to downgrade India's local currency rating will not impact India Inc cost of funds, according to bankers and analysts.
The consensus stems from the fact that the corporates are not borrowing abroad at the moment and in the case of equity issues, foreign investors take exposures on companies and not the country.
However, the financial sector is split over the downgrade. While one section views the downgrade in light of the Centre's failure to put in place a proper fiscal management system, the other section feels the action is unwarranted.
"S&P is planning higher ratings for corporates than their respective countries. Once that is done, country ratings become irrelevant," said a banker.
State Bank of India chairman Janki Ballabh said the downgrade was "unwarranted" since nothing has changed and the economic fundamentals are strong.
Private sector IndusInd Bank managing director Bhaskar Ghose said the global lenders, who have marginal exposure to India, may adopt a wait-and-watch policy, but those who have huge exposure will not change their outlook. "There is always a difference in perception between the rating agencies and the actual lenders," he said.
Analysts point out to several positive indicators. The foreign currency reserves of the country stands at $43.682 billion - the highest-ever the country has achieved. Total current account stands at a surplus of $771 million in the first quarter of the calendar year compared with a deficit of $1.069 billion over the corresponding period of the previous year.
Interest rates across the economy went down heavily since the beginning of the fiscal year. The 10-year sovereign yield fell by more than a percentage point to 9.30 per cent last month.
The inflation rate is hovering in the comfortable level of 5-5.50 per cent level during the current financial year and the market is flushed with the liquidity to support even if there is slippage in the government borrowing programme.
The immediate provocation for the downgrade could be the turmoil in the financial sector. According to Sanjit Singh, fixed income analyst with ICICI Securities and Finance, "The S&P downgrade was on the concern over huge budget deficit and the rising domestic indebtedness of the central government. There has been lack of commitment from the central government side to contain the budget deficit."
Ajit Ranade, chief economist, ABN Amro Bank, points out: "The slippage in budget deficit may not be the trigger point for downgrading. It is rather the political uncertainty, slow pace of divestment and delay in the implementation of proposed legislation to restrict the budget deficit that might have pushed the rating agency to downgrade and I feel it is quite justified."
S&P feels that aggregate budget deficit including both the central and state governments is likely to exceed 10 per cent of the gross domestic product (GDP) in the current financial year while government debt will be near to 70 per cent of the GDP. The fiscal deficit of the central government stands at Rs 23,360 crore in April-May period of the current financial year compared with Rs 18,375 crore during the corresponding period of the last year.
Government security prices, however, reacted strongly to the downgrading announcement as the prices for the securities at the long end of the market fell by 40-45 paise. The yield of 10-year paper went up by six basis points to 9.36 per cent after the announcement.
