Moody's to discuss India's sovereign ratings

Global credit rating agency Moody's is scheduled to discuss India's sovereign ratings with the country's economic policy makers here Monday, just a few days after downgrading its outlook on the nation's banking system.

A team from the US-based Moody's is scheduled to hold consultations with officials of India's finance ministry here to discuss the overall economic scenario as well as the sovereign ratings, a senior bureaucrat in North Block said, requesting anonymity.

The review is scheduled Tuesday. Earlier, the agency had downgraded its outlook on India's banking system to "negative" from "stable" in the report released Nov 9.

The rating agency defines a "negative" outlook as one characterised by volatility and uncertain conditions.

Analysts said the ratings agency was likely to make some critical observations about the country's sovereign ratings in view of the out of control inflation and fiscal deficit coupled with slumping growth and a little progress on economic reforms.

"Definitely, there are causes of concern -- inflation is out of control, the fiscal deficit target is unlikely to be met and now the growth is slowing down," said Sanjeev Krishan, executive director at PricewaterhouseCoopers (PwC).

"But any downgrade will be premature at this stage," Krishan told IANS, pointing out that the current rating -- which is not exactly quite positive -- will continue given the prevailing economic situation and the overall domestic and global outlook.

Moody's has assigned India "Baa3" rating, which is the lowest in the investment grade.

In October, Moody's cut its standalone ratings on the country's largest lender State Bank of India by a notch to D+ from C-, leading to a plunge in the company's share price.  

"It is a good wake up call. Banks have a role to fund growth but they have to take care of their balance sheets. There is a definite challenge. Looking at what is happening to airline, telecom and other sectors, banks have to be careful in lending," Krishan said.

Ratings downgrade makes borrowings costlier for the country and its industry. Moody's had already issued a warning on India's economic outlook when it downgraded the rating of 15 commercial banks.

"India's economic momentum is slowing because of high inflation, monetary tightening, and rapidly rising interest rates," Vineet Gupta, Moody's vice president and senior analyst, had said.

"At the same time, concerns have emerged over the sustainability of the recovery in the US and Europe, and rise in the borrowing programme of the Indian government, which could drain funds away from private credit market."

Krishan said the government is in a catch-22 situation over inflation and growth.

"It's a difficult zone. On the one hand the government is struggling to tame prices and and meet fiscal deficit targets. On the other, a stimulus is needed to push growth. But that will worsen the situation of inflation and deficit," he said.

"This could prompt Moody's to downgrade ratings."

In 2010, Moody's upgraded India's local currency government bond rating by a notch to "Ba1" from "Ba2". Yet, India's local currency bonds remain below an investment grade rating.

Analysts fear any ratings downgrade or negative comments now would send the wrong signals.

"A ratings downgrade will definitely impact the market. People start feeling unsafe about the country. Of course, some people will have a long-term view, but those who have a short-term view will definitely pull back," Krishan said.