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Journalism of Courage
NEW DELHI, JAN 8: The Bombay Stock Exchange (BSE) sensex crashed by 85 points on news that the global credit ratings agency Moody’s Investors Service was planning to downgrade India’s ratings to just below investment grade. As bears tightened their grip over the market, speculators rushed to sell around Rs 600 crore of shares in one single trading session.
With the Moody’s statement coming on top of the current political turmoil, analysts expect the sensex to tumble further over the next few days. The crash of the Asian stock markets and currencies has also hit sentiments, especially that of foreign institutional investors (FIIs) who are currently among the biggest buyers in the stock markets.
Moody’s public announcement was followed by a high-level meeting in the Ministry of Finance to take stock of possible repurcussions that may follow a downgrading. Following this, the ministry (and the Reserve Bank of India in Mumbai) came out with similar statements on how they saw no reason for a possible downgrade. Top ministry officials said they planned to meet Moody’s but refused to say when this would take place. The country rating given by international rating agencies like Moody’s, Standard and Poor etc is reflecting their opinion about the economic strength of the country -especially the investment climate in view of variations in a number of parameters like the balance of payment deficit, export and industrial growth, inflation, exchange and interest rate and political stability.
Foreign investors who have investment interest in India – both foreign direct investment and portfolio investment take their investment decisions on the basis of these ratings. A downgrading of the country’s sovereign rating below investment grade would compel the investors to pull out of the country as is currently happening in the South East Asian region.
Listing its reasons for the rating review, Moody’s said that it apprehended that increasing political pressure — triggered by the upheavel experienced in the “more open Asian markets” — will slow down the reform process in India. It also warned that heavy reliance on external debts — by both private as well as public sector companies — can be problematic in the absence of strong export and industrial growth and “an arguably overvalued exchange rate”.
Along with the country, the ratings of several top corporates such as Reliance Industries and Telco will also be lowered — by convention, they cannot be rated above the country’s rating. In other words, cost of borrowings abroad are likely to go up. Says Devesh Kumar, analyst at the foreign broking house Hoare Govett Asia: “If the downgrade takes place it will be bad for India. Indian companies will find it difficult to borrow overseas.”
While FIIs have not reacted to the Moody statement so far, it is interesting that just last week a leading foreign broking house HSBC Batlivala & Karani put out a report saying that it expected Gross Domestic Product growth to slow down further to around 4.5 per cent in 1998-99. Vivek Parikh, senior insititutional sales manager with Classic Share and Stock Brokers, said that this could tilt the balance against India as far as FII investment is concerned.
A statement by the New York-based Moody’s attributed the decision to the fact that “the impetus for structural reform has diminished relative to the agency’s expectations when the country celing ratings were raised to their current level in December 1994.”
