Moody8217;s hints at downgrading India

In a statement issued in New York, Moody8217;s said 8220;India8217;s current BAA3/BA18242; country ceilings for foreign currency debt and bank deposits are on review for possible downgrade.8221; Moody8217;s also said it would continue to assess whether international and domestic decisions allow India to avoid the pressure resulting from market volatility, and to resume the structural reforms process that will encourage long terminvestment.

Samp;P recently changed the outlook on India8217;s foreign currency rating from stable8217; to negative8217;, citing sanctions following nuclear test explosions and several other issues including high fiscal deficit for their action. It, however, had retained the sovereign rating at quot;BBquot;.

Moody8217;s has been assessing the likely foreign and economic policy framework of the new coalition government since it assumed office in March.

8220;Indications regarding the BJP-led government8217;s position on such critical issues as trade and investment liberalisation were often contradictory. In addition, the mix of political parties and personalities that made up the new government seemed inherently unstable, raising the potential for yet another transition,8221; it said.

The world opinion towards the South Asian region was turning negative after the series of tests by India and Pakistan, Moody8217;s said.

Even though Samp;P expressed disappointment at 8220;lack of steps8221; in recent union budget to address the large fiscal deficit,it stressed that there would be no downgrading of the country8217;s sovereign rating in the next couple of months. 8220;India8217;s sovereign rating would not change in the next couple of months unless the country faced unexpected developments,8221; Samp;P director public finance ratings services Rick Shepherd told reporters after a seminar here on Thursday.

Shepherd said the central government did not really take serious steps to address the fiscal deficit issue. 8220;A downgrade is possible, if over a period the sanctions pinch. The overriding step required in the budget was an attack on the fiscal deficit,8221; he emphasised.

The Moody8217;s threat to downgrade India came after Standard amp; Poor8217;s Samp;P downgraded the outlook for India8217;s foreign currency rating from stable to negative last week. This has already put pressure on the rupee, FII fund inflows and pushed up interest rates on overseas borrowings. Significantly, Samp;P fell short of downgrading India8217;s rating and preferred to change its outlook only from stable tonegative. Samp;P said quot;a rating downgrade could occur if economic sanctions materially worsen the country8217;s access to external funding, lower its growth prospects, and exacerbate its already high fiscal deficit.quot;

While changing the outlook for India, Standard amp; Poor8217;s had said 8220;India8217;s balance of payments could come under increased strain in the medium term from reduced inflow of both official and private capital.8221; Samp;P also fears that reduced access to concessional loans which now comprise nearly 43 per cent of the country8217;s external debt will increase the country8217;s dependence on higher cost private funding.