S&P cuts India’s rating outlook on weak govt finances

[Naveed Yaseen]

MUMBAI: Standard & Poor’s cut its outlook on India’s long-term sovereign credit rating to negative from stable on Tuesday, citing worsening government finances, which could raise firms’ overseas borrowing costs and weaken the rupee.

“The outlook revision reflects our view that India’s fiscal position has deteriorated to a level that is unsustainable in the medium term,” said S&P in the statement.

S&P retained its BBB-minus long-term sovereign rating for India and its A-3 short-term rating. Both these are the lowest rung of investment grade. Finance Minister Pranab Mukherjee said S&P’s move was not unexpected, adding the global meltdown has its consequences.

The rupee briefly fell to 49.92 per dollar from 49.82 beforehand, while the yield on the benchmark bond stayed steady immediately after the S&P announcement. It rose 4 basis points to 6.62 percent after the government announced duty and service tax cuts.

S&P said it expects the general government deficit, which includes off-budget items such as oil and fertiliser bonds, to increase to 11.4 percent in the fiscal year ending in March, up from 5.7 percent in the previous fiscal year.

The ratings agency said it expects a fiscal deficit of 11.1 percent in the fiscal year ended in March 2010, more than double the government’s estimate of 5.5 percent.

The ratings agency called India’s weak fiscal position “the single-largest negative factor for the sovereign ratings.”

Fitch last week also called the country’s fiscal position its main concern for India. It currently has BBB-minus ratings, with a negative outlook on the local currency rating and a stable outlook on the foreign currency. Moody’s has an equivalent Baa3 rating with a stable outlook. reuters

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