Analysts and economists today termed Standard & Poor's decision to lower the country's rating outlook close to junk status (BBB-) as "reactionary and out of context",saying there has been "no immediate trigger". "It is not warranted at all now,though concerns remain. It is too premature for S&P to do it now. These issues were in place already. S&P is very reactive but Moody's is balanced," State Bank of India economic research head Brinda Jagirdas said. Terming the action as "not a downgrade but only highlights the already existing concerns" which the government is seized of,she said these concerns were known and did not warrant a change in the outlook. "There is no trigger for S&P to do it now. So I would say this is only a reactive action." S&P today cut its India outlook to negative from stable,and warned of a sovereign downgrade in two years if the fiscal and current account situations do not improve and the political climate continues to worsen. "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," said S&P credit analyst Takahira Ogawa. BBB- is the lowest investment grade rating. "A downgrade is likely if the country's economic growth prospects is dim,its external position deteriorates,its political climate worsens,or fiscal reforms slow," the agency said. But Jagirdas said the move will not have any impact on the cost of funds for either the banks or the corporates. Pointing out that "the country has good savings and investment rates",she said "our fiscal deficit is much better than most of the European economies." However,Jagirdas admitted that negative rating outlook clearly points to urgency of the need for immediate government steps to reignite growth,and to bring down subsidies and current account deficit. Nomura India also ruled out possibility of a real downgrade,considering the steps the government is taking on the flagged concerns. "We believe there is a low likelihood of a rating downgrade actually occurring as we expect the economy to see some cyclical rebound in the near term,the debt-to-GDP ratio is likely to remain stable,and the fiscal deficit should not worsen substantially. The only risk to this view is forex reserves declining materially," Nomura economist Sonal Varma said. A Deutsche Bank report said if growth recovers somewhat and inflation does not soar again,the lack of structural improvement in the fiscal position need not be an immediate spoiler of the ratings outlook. "Our central scenario is that conditions do not deteriorate to the extent to warrant negative ratings action this year. But the risks are clearly not trivial," the report concluded. However,Yes Bank chief economist Shubhada Rao said she does not expect S&P move leading to a downgrade. "There will be no expeditious action on that front. However,I think,the S&P move will galvanise government action on the pain points soon. Though major reforms are tough,I think we can see definitive actions on expenditure management,especially on the fuel pricing front which will reduce the subsidy burden,coming up in the next few months. In the short term,there can be some impact on corporates borrowing abroad and capital inflows due to the action," Rao said. SMC Global Securities strategist and research head Jagannadham Thunuguntla said the S&P move would have serious implications. "The new sovereign rating is just one step away from junk bond status.Somehow I feel the dream of India growth story is coming to an end," he said. India Forex Advisers founder & chief executive Abhishek Goenka also said the S&P action will raise the cost of borrowing from overseas for domestic corporates.
