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S&P cuts India's currency rating to 'junk'

Ratings agency Standard & Poor's said on Thursday it lowered its rating on India's local currency denominated debt to 'junk', citing the South Asian giant's swelling debt burden and the country's vulnerable public sector finances.

S&P said it cut its rating on India's long-term debt denominated in the national currency, the rupee, to BB-plus from BBB-minus, a single notch cut that strips India's local debt of its prized investment grade rating.

The agency also downgraded India's short-term rupee-denominated debt to B from A3.

"The local currency downgrade reflects the government's growing Indian rupee debt burden and its inability to staunch the financial weakening of the public sector," said S&P managing director John Chambers in a statement.

Indian government, a coalition of two-dozen political parties, has been unable to contain its growing budget deficit, expected to reach 6 per cent of GDP in the current fiscal year, S& P said.

Standard & Poor's, has, however, affirmed its BB long-term and B short-term foreign currency Indian sovereign credit ratings. The outlook on both long-term ratings remains negative.

In January this year, another global rating agency, Moody's, had said India's ratings outlook was clouded by the lack of progress on fiscal reforms. However, it did not downgrade.

The last time Moody's revised India's rating was on August 8 last year, when it assigned a stable outlook on its Ba2 foreign currency country ceiling and a negative on its Ba2 rating on domestic currency debt of the government.

India is the eighth nation to lose its investment-grade rating on its local currency debt since Standard & Poor's began assigning local currency ratings in 1990.

According to him, the inability of the country's leadership, cutting across all political parties, to implement announced reform policies in a timely manner, contributes to India's falling creditworthiness. "For example, recent political disagreements threaten to set back India's privatisation programme, which enjoyed success in recent months," Chambers explained.

"The resulting loss in the government's credibility, along with the revenue foregone from the sale of large public-sector firms, weakens investor confidence and enlarges the government's borrowing needs."

Standard & Poor's said the government's policy of borrowing mainly in the domestic market while maintaining controls on capital account flows would limit, for now, the impact of fiscal problems on the external sector.

However, the growing local currency debt burden hurts the country's macroeconomic stability and lowers growth prospects, reducing the government's ability to raise sufficient tax revenue in the future to service both its local and foreign currency debts. Continued large fiscal deficits, along with a languid pace of economic reforms, might lead to a further rating downgrade.

(With additional inputs from Business Standard)

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