With S&P threatening another downgrade in the event of an Indo-Pak war, and the markets falling close to 8 per cent since May 13, gloom and despair have engulfed Dalal Street again. The good news first. An S&P downgrade won’t cause a stampede of FIIs running to the exit door. Says the head of US-based investment firm in India, ‘A downgrade by S&P would not in our view be a catalyst for FIIs to pull out of the India market.’ The bad news, in the words of the FII chief: ‘It would be another negative on top of the border tensions, and India’s weight in the MSCI falling from 5.5 per cent to 3.9 per cent. Indeed, there is already pressure to reduce holdings in India.’Figures put out by Sebi reveal that FIIs are on the exit mode. FIIs pulled out a net Rs 201.8 crore during May (1-21) and Rs 112.9 crore in April. “FII inflows have already dried up. Indian stocks offer good value. basically we need good news for inflows to come in. But a war in the region can affect further inflows. I don’t expect any downgrade by international rating agencies at the moment. The possibility of any downgrade is speculative,” says John Band of ASK Raymond James.S&P downgraded India’s long-term local currency rating to BBB-minus from BBB last August and said the outlook for its local and foreign currency ratings was negative, meaning they may be lowered further. India’s long-term foreign currency ratings have been unchanged since October 1998 when S&P downgraded them to BB from BB-plus. Foreign investors avoid investment in countries which are rated below BBB. This means India cannot afford another downgrade at this juncture and risk future FII inflows. Moody’s also lowered outlooks (in August 2001) for India’s ratings: to stable from positive for the Ba2 foreign currency country ceiling, and to negative from positive for the Ba2 rating assigned to the domestic currency debt.India witnessed an outflow of $338 million (Rs 1,479.9 crore) in 1998 as global rating agencies downgraded the country after the Pokharan blasts. However, FIIs invested heavily in the following years: $1559 million in 1999, $ 1492 million in 2000 and $ 2843 million in 2001. This huge FII inflows—and the Resurgent India Bonds—contributed substantially to the foreign exchange reserves which have now crossed the $ 55 billion mark.
