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Tuesday, June 19, 2012

After S&P, it is Fitch, to downgrade India rating

From his birth in Gah to Cambridge, winning the Wright’s Prize, this Doctor was known to be a great economist and his tenure as FM would be remembered for the economic reforms, ending the Licence Raj and opening the Indian economy. But Dr Manmohan with Pranab Mukherjee are now regularly in the news for falling economy.

After the S&P downgrade threat, it does not augur well for the Nation that another Global rating agency Fitch,  downgraded India's credit outlook to negative citing corruption and lack of reforms; as expected,  the government chose to reject the observations saying they were based on old data. Fitch's move to lower the country's credit rating to negative from stable comes less than three months after rival Standard & Poor's did a similar downgrade.  India faces an "awkward combination" of slow growth and elevated inflation as well as structural challenges surrounding its investment climate in the form of corruption and inadequate economic reforms, Fitch Ratings said in a release today.

According to Presidential aspirant, present Finance Minister Pranab, it was based on "older data" as it ignored recent positive trends. Chief Economic Advisor Kaushik Basu  choose to attack the agency and the move stating that "There is a herd mentality among policymakers, herd mentality among corporates. There is also little bit of herding among credit rating agencies. We were pretty much expecting Fitch to do so."  According to Fitch, the outlook revision reflects heightened risks that India's medium to long-term growth potential would gradually deteriorate if further structural reforms are not hastened, including measures to enhance the effectiveness of the government and create a more positive operational environment for business and private investments. Fitch also downgraded the credit outlook of seven PSUs -- NTPC, SAIL, IOC, PFC, GAIL, REC and NHPC.

The rating agency, however, has retained the India's sovereign rating at 'BBB-', a notch above the speculative grade.  Fitch is dual-headquartered in New York and London with over 50 offices worldwide.  Fitch Ratings is a global rating agency dedicated to providing value beyond the rating through independent and prospective credit opinions, research and data. In addition to offering proprietary content, the firm also distributes the ratings, research, financial data and analytical tools of Fitch Ratings. In 1924, the Fitch Publishing Company first introduced the now familiar "AAA" to "D" ratings scale to meet the growing demand for independent analysis of financial securities.

Fitch rating is not all negative -  the narrow victory of New Democracy in the Greek parliamentary elections means the near-term risk of a Greek disorderly debt default and exit from the euro has fallen. Consequently, Fitch has stated that it will not place all eurozone sovereigns on Rating Watch Negative as it had indicated would be the case if a Greek euro exit were a probable near-term event. It added that while the risks from Greece have fallen for now, the severity of the systemic crisis engulfing the eurozone is unlikely to diminish until European leaders articulate a credible road-map that would complete monetary union with much greater fiscal and financial integration.

It is not easy to understand how the result of election could change a rating – but if it is all about perception of how economy would perform, perhaps yes.  At the same time, Fitch Ratings chose to revise India’s outlook to negative from stable. Its Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) have been affirmed at ‘BBB-’ and Short-Term Foreign Currency at ‘F3′. India’s Country Ceiling is also affirmed at ‘BBB-’.  The Outlook revision reflects heightened risks that India’s medium- to long-term growth potential will gradually deteriorate if further structural reforms are not hastened, including measures to enhance the effectiveness of the government and create a more positive operational environment for business and private investments.

In the Nation, real GDP grew just 6.5% yoy in FY2011-12 (end-March 2012), down from an 8.4% rise in FY2010-11.  Fitch forecasts real GDP to rise 6.5% yoy in FY13, down from a previous projection of 7.5%.  India’s public finances are a key rating weakness compared with other ‘BBB’-rated sovereigns, which constrains scope for fiscal policy flexibility. India’s external financial position remains a rating strength, although this is eroding as foreign exchange reserves have fallen and net external indebtedness is rising.

Based on the interview on CNBC-TV18, Fitch sovereign ratings around the region, around the world are periodically or annually reviewed and they assessed India across a broad range of factors, ranging from the macro economic policy, economy, public finances, external finances and structural issues- and to them it appeared that the countries economic and fiscal prospects had weakened. That is a combination of slowing growth, and rising inflationary pressures. The public finances, at the centre, have weakened.  According to the rating Agency, sharp improvement in this fiscal, consolidation process, material improvement in the growth outlook or material improvement in inflation and an improvement in the investment climate should certainly be supportive developments from the ratings. Conversely, if there is deterioration in the growth for fiscal outlook, that obviously wouldn’t be helpful. 

Only recently, Standard & Poor’s has warned India its sovereign debt rating could fall from investment grade; there was surprise when they cut the rating of the United States a few months ago from AAA to AA+. India’s rating is BBB-, which is the lowest possible investment grade. India got the rating five years ago, the poorest nation in the world ever to get an investment grade rating. In comparison, China’s is AA-, while Pakistan’s is B-, which places it in the junk bonds category.

With regards – S. Sampathkumar.

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