The downward revision in India’s rating outlook from ‘stable’ to ‘negative’ by Standard & Poor’s is a grim reminder to policymakers and fiscal managers: perform or perish. If a downgrade happens in the near future, it could impact capital flows and push up borrowing costs of Indian firms abroad.
After a dismal 2011, portfolio flows had picked up in the January-March quarter of 2012. If inflows fall again, it could impact India’s external sector as the country was financing its current account deficit with capital flows. “While this (downgrade) is incrementally negative for the rupee and capital flows (portfolio and direct), we believe the rating remaining at investment grade contains the damage.
Had a rating downgrade (to non-investment grade or junk) happened, it would be far more negative, since it would escalate funding costs for Indian firms abroad, and preclude some FIIs to access local debt and equity markets,” said GautamTriveri, MD, Religare Capital Markets.
Many foreign funds invest in a country depending on the rating. If its rating is junk, why should they put money? The chain reaction will continue with a negative impact on the rupee and its impact on inflation and costly imports.
Even the change in outlook might turn costly for Indian borrowers. “Most of the issues have already been well known and factored by the stock market and currency markets. But this definitely does not help the sentiments. Foreign currency loan market has been very tight (especially from Europe) and this could lead to a rise in spread from Indian borrowers,” said Abheek Barua, chief economist, HDFC Bank.
A school of thought feels that the S&P move will force the government to perform. “...it should force the government to think about fiscal situation. It has no choice but to bring reforms to improve fiscal deficit,” said Vijay...