Standard & Poor's (S&P) yesterday lowered the foreign currency credit ratings of Indian banks, financial institutions and corporates by a notch to `BB' from `BB-' and changed the outlook from negative to stable, in line with its downgrade of the sovereign rating on Thursday.
S&P's action will impact the foreign currency credit ratings of Industrial Development Bank of India (IDBI), ICICI Ltd, Bank of Baroda, Larsen & Toubro, Reliance Industries and Tata Engineering and Locomotive Co Ltd (Telco).
S&P has rated ICICI's $150 million subordinated debt issue a notch lower at `B+' with a stable outlook.
The ratings are foreign currency counterparty ratings and those for senior notes of IDBI and ICICI. IDBI has a $150 million issue due in April 2004, while ICICI has two senior debt notes due in July 2003 and May 2007.
The short-term foreign currency ratings of ICICI, IDBI, BoB and SBI were affirmed at `B'. S&P also affirmed Telco's `BB+' local currency corporate credit rating and the local currency negative outlook.
S&P has, however, maintained the foreign currency outlook at stable in light of the ongoing regulatory and structural reforms balancing persistent government deficits.
On Thursday, S&P cut India's sovereign rating citing fading prospects for meaningful fiscal adjustment, lower gross domestic product growth and a rise in the external debt burden.
The annual consolidated government deficit, including that of state governments, is likely to remain around 8 per cent of the GDP over the next few years, S&P said.
According to S&P, general government debt, including debt guarantees offered by state governments, is likely to exceed 70 per cent of the GDP in the coming years, while interest payments will account for nearly half of the Centre's revenues.
In the absence of significant fiscal adjustment, public sector debt as a percentage of GDP will rise as real interest rates on government borrowings begin to exceed GDP growth, S&P said. It said the financing of the fiscal deficit, along with that of non-financial public sector enterprises, could consume nearly 40 per cent of annual savings. "The inefficient use of much of India's domestic savings will continue to constrain growth and development prospects," S&P said.
Persistent fiscal pressure in a more liberalised economy will undermine the country's ability to maintain economic growth in the medium-term without increasing its current account deficit and external commercial borrowings, thereby raising its already high external debt burden. Total external debt is estimated to reach 180 per cent of exports this year, which is one of the highest among the rated sovereigns.
Foreign exchange reserves, which are around 1.5-2 times short-term debt in 1998-99, are expected to mitigate the risk of a loss of external confidence in a scenario of stagnating exports and a widening trade gap.
