India ratings may suffer if war tensions persist: S&P

Rising tensions with Pakistan will push India’s sovereign ratings closer to the edge if they worsen its already deteriorating fiscal situation, rating agency Standard & Poor’s said on Monday. S&P placed India’s outlook for both local and foreign currency at negative last August when it downgraded the long-term local currency ratings to BBB-minus from BBB. A negative outlook means a rating 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. Most foreign investors cannot put money into countries which are rated below BBB. “Of course the current bond yield is not encouraging at all…but it (rating) depends on how long this situation will persist and affect the yields or the fiscal situation,” said Takahira Ogawa, S&P’s director Asia-Pacific sovereign ratings in Singapore.

The yield on India’s benchmark 10-year bond rose to 8.17 per cent, up from 7.66 percent at the start of last week. It has risen some 95 points from a lifetime low of 7.14 per cent hit in early April.

Rising yields on bonds would raise the cost of funding India’s 5.3 per cent budget deficit set for the fiscal year to March 2003. The level of government debt is set to hit 85 per cent of gross domestic product this year, according to S&P. “Even before this situation we had indicated a negative outlook which means that if the fiscal trajectory is not changed for good in the medium term we may have to consider a downgrade,” Ogawa added.