DCR8217;s concern over sanctions

MUMBAI, May 19: Even as several foreign banks stopped credit facility to Indian banks, Duff amp; Phelps Credit Rating Agency DCR, the int...

MUMBAI, May 19: Even as several foreign banks stopped credit facility to Indian banks, Duff amp; Phelps Credit Rating Agency DCR, the international credit rating firm, today expressed serious concern over the impact of US economic sanctions on the credit rating of India8217;s foreign currency obligations.

Currently, DCR rates India8217;s foreign currency sovereign obligations at BBB-8216; and local currency obligations at BBB8217; with a stable outlook on both the ratings. DCR said in a statement that the decision of the US to impose economic sanctions on India following its underground nuclear weapons tests could negatively affect India8217;s balance payments and also could result in lower capital inflows.

The DCR statement is in sharp contrast to the stand of other global rating agencies. A top official of Standard amp; Poor8217;s had recently said it would not review the Indian rating following the nuclear tests. quot;The fundamentals of the Indian economy are strong enough to be able to withstand any pressure arising out ofeconomic sanctions8230; The sanctions will not have any long-term impact,quot; Standard amp; Poor8217;s president and chief rating officer, Leo C O8217;Neill, had told an Indian daily last week.

On the other hand, after US and Japanese banks, a Canadian bank has stopped the line of credit to Bank of India. Royal Bank of Canada has suspended the existing line of credit to the BoI in a bid to toe the line of US banks.

However, the Canadian government has not announced any sanction against the country following the nuclear tests by India. The proposal of State Bank of India and Bank of India, the only two Indian banks with branches in Japan, for opening fresh credit lines were turned down by the Japanese banks the other day. At the same time, European banks have got an upper hand over their US and Japanese rivals following the latter8217;s decision to withdraw credit facilities.

In the meantime, DCR said it is also concerned over the fiscal slippages that took place in 1997-98. Although the targeted fiscal deficit of thecentral government for 1997-98 was put at 4.5 per cent of GDP, the estimated fiscal deficit had been placed at 6.1 per cent of GDP, the credit rating agency noted. quot;Further, fiscal pressures had been accentuated by slower GDP growth estimated at five per cent in 1997-98, down from six per cent in 1996-97,quot; it said.

DCR said it would seek to assess the political and budgetary implications of heightened security concerns in the South Asian region. It admitted that quot;India remains somewhat more insulated from confidence shocks than most sovereigns, given the relatively closed nature of its economy.quot;