Contrary to expectations S&P warns of rating downgrade for India from the current grade ‘BBB-’

May 22, 2013

Giving a shocker to the Indian government’s expectations of an upgrade in its sovereign ratings, Standard & Poor’s (S&P) has done just the opposite by warning of a further downgrade from the current grade ‘BBB-’ with a ‘negative’ outlook to Junk status.
Government on the other hand was expecting a boost in ratings on account of its strong foreign reserves and incoming foreign investments.
Why this step from S&P?
S&P wants Indian government to go ahead with the economic reforms at a faster pace. The downgrade will be likely if the government failed to keep pace with the global rating agency’s expectation on reforms and containment of the twin deficits. Despite the fact that S&P acknowledged India’s long-term growth prospects, underpinned by its favourable demographic profile and its high foreign exchange reserves which support the ratings, the country’s large fiscal deficits and debt, as well as its lower middle-income economy are constraints to the ratings. At the same time high fiscal deficits and a heavy government debt burden which “remain the most significant constraints on our sovereign ratings on India
What is Junk status?
Currently India is rated as grade ‘BBB’. A further downgrade from ‘BBB-’ would mean a scale-down to ‘speculative’ grade or ‘junk’ status which renders all overseas borrowings by corporates and other entities costlier.

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