Credit rating agency Standard and Poor's (S&P) Monday said that India could lose its investment grade rating due to its weak GDP growth rate and political roadblocks to economic policymaking.
A recent report by Standard & Poor's Ratings Services, titled Will India Be the First BRIC Fallen Angel?, analyzed the forecasts for economic growth and the possible effects on business confidence and the government's commitment to economic reform.
The report said, Indian government's reaction to potentially slower growth and greater vulnerability to economic shocks could largely determine whether the country can maintain an investment-grade rating or become the first 'fallen angel' among the BRIC nations (which also comprise Brazil, Russia, and China). The 'BBB-' long-term sovereign credit rating on India is currently one notch above speculative grade.
Though the report has stated that India is in a better position to withstand the current global uncertainty than it was in the 1990s when it had a balance-of-payments crisis, analysts opine that country's policy road blocks can hurt its credit rating dearly.
Setbacks or reversals in India's path toward a more liberal economy could hurt its long-term growth prospects and, therefore, its credit quality, said Standard & Poor's credit analyst Joydeep Mukerji.
Standard & Poor's revised India's rating outlook to negative from stable in April 2012, citing the country's lower GDP growth prospects and risks involved in its external liquidity and fiscal flexibility.
Markets Shed Gains
Indian Markets reacted sharply to the S&P report. BSE Sensex lost the gains made in the morning and post-noon session to close at 16668, down 51 points from the previous close. NSE Nifty closed at 5054, down 14 points from the previous close.
The Indian markets started trade positively Monday morning with the Nifty crossing 5100 in opening trade. The strong cues from the Asian markets and a stronger rupee helped the Sensex reach a high of 16,893.81, up 174.94 points from its previous close, and Nifty reached 5,121.65, up 53.30 points.
S&P statement is very negative for Indian market as this would spook already weak foreign flows, which had improved in the last few days on account of positive global cues. Rating downgrade would keep pension funds and other long term funds away from India, the Economic Times reported quoting A K Prabhakar, senior vice president (Equity Research) at Anand Rathi.
The CNX Midcap index was down 0.3 percent while the BSE Smallcap index gained 0.2 percent in Monday's trade. The market breadth was positive with advances at 745 against declines of 679 on the NSE.
Top Sensex gainers were Tata Power (2.18 percent), Bajaj Auto (1.85 percent), Hindustan Unilever (1.58 percent), Gail India (1.55 percent), Coal India (1.44 percent) and Sterlite Inds (0.84 percent).