S&P Negative on India, but Moody’s Fine Some Good, Some Bad S&P lowers outlook on worsening fiscal nos, but rival livens up hopes

 Ahassled government has just come under more pressure. Along with bad press, angry corporates and disillusioned foreign investors, it has to now deal with a 'negative outlook' tossed by the world's largest credit rating agency, Standard & Poor's (S&P). 

The saving grace is that an hour before the S&P announcement, rival rating agency Moody's said the Indian economy is "growing solidly, but below potential". 

The divergence of views between the two agencies is a reminder of the US downgrade last August when Moody's had countered Standard & Poor's to say America was still a triple-A economy. On Tuesday morning, S&P, while retaining India's 'investment grade' rating, revised its outlook from 'stable' to 'negative' due to worsening fiscal numbers. It's a veiled threat that the sovereign rating may be downgraded from BBB-, which is the lowest-rung investment grade, to speculative grade if New Delhi fails to pull up its socks. But, the finely-timed Moody's statement helped allay fears that a downgrade was imminent. 

An Unwarranted Step, says Ranga 

PMEAC Chairman C Rangarajan, in an interview to Deepshikha Sikarwar, says S&P's decision to cut India's outlook to negative from stable was not warranted. 

•

•13 Governance is the key 

A rating downgrade from S&P is not the end of the world for India's economy or policymakers. After all, this is the same agency that stamped AAA ratings on worthless mortgagebacked securities in the US, leading to the great recession. India's low exposure to global credit markets means that the effect of the downgrade on interest rates will be minimal. But policymakers can't be complacent. This is as good a time as any to step on the reforms pedal. For that to happen, the Singh administration must stop squabbling and start working together as a team. Some Reason for Optimism: Moody's 

According to S&P credit analyst Takahira Ogawa, "The outlook revision reflects our view of at least a one-in-three likelihood of a downgrade if the external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow in a weakened political setting." 

However, Moody's livened up hopes as it said there was some reason for optimism due to interest rate cuts and prospects of a good monsoon. India's economy is "now growing below potential as a combination of bad luck and poor economic management weighs on sentiment", said Moody's. 

Bankers and economists ET spoke to said the outlook change would not raise overseas borrowing costs of Indian companies, particularly wellperforming ones. But the government, according to one of them, may have to think of programmes like a special NRI deposit scheme to bring in foreign capital to tackle the balance of payments problem. Partly due to Moody's and possibly because of the reduced aura of rating agencies, jumpy traders covered their short positions in the afternoon after overreacting to the morning news. The Sensex, which slipped 180 points moments after the S&P release, closed at 1,751.29, down just 56 points. The rupee ended 12 paise higher at 52.53/54 against the dollar. 

"I m concerned but I don't feel panicky because I'm confident that our economy will grow at 7%, around 7% if not plus. We will be able to control fiscal deficit and it will be around 5.1%," Finance Minister Pranab Mukherjee told reporters. He also said the government will be able to enact the Direct Taxes Code in the next session of Parliament. According to Brinda Jagirdar, head of SBI's economic research, a revision in outlook was not warranted as there was no particular event to trigger it. S&P, however, is not so bullish on India's growth forecast. It expects gross domestic product to grow at 5.3% in 2012-13 – significantly lower than IMF's forecast of 7.1% and Moody's 6.1%. The Indian government has targeted a GDP growth of 7.6% in 2012-13 as against 8.35% achieved last year. "The outlook revision may weigh down the rupee but the impact won't be much," said Rashesh Shah, chairman, Edelweiss Financial Services. Interest cost may go up marginally for tier-II companies, according to Joiel Akilan of Spanish bank BBVA, which arranges foreign currency borrowings of Indian companies. Parthasarthy Mukherjee, president treasury and international banking at Axis Bank, said while the rating revision can be a cause for concern in future, borrowing cost will not rise unless there is an actual downgrade. Investors, however, will closely track the rupee in the coming days due to widening current account deficit, lower foreign exchange reserves and possible BoP shocks due to stock selling by foreign portfolio managers. Some like Indranil Sengupta, chief economist-India, BofA-Merrill Lynch, feel since it's difficult for government to dramatically improve fiscal deficit in the short term, it should look for avenues to bring in more foreign capital, particularly with FIIs holding back investments. "A scheme to attract NRI deposits will help. It may appear expensive, but the benefits may far outweigh the costs as forex reserves will rise," said Sengupta. S&P has also revised outlooks on 11 Indian financial institutions, including SBI, ICICI, and HDFC Bank.