In the report Will India be the First BRIC Fallen Angel, S&P said the Indian government’s reaction to potentially slower growth and greater vulnerability to economic shocks will largely determine whether the Asia’s third largest economy remains within the investment band, or becomes the first “fallen angel” of the BRIC nations.
India currently holds a BBB- rating from S&P which is just one rating above junk status and the lowest rating among its BRIC counterparts. A junk rating could dry up capital inflows and make it harder for Indian companies to raise funds overseas.
S&P added that “slowing GDP growth and political roadblocks to economic policymaking are just some of the factors pushing up the risk that India could lose its investment-grade rating.”
In April, S&P lowered the outlook for India to negative from stable.
Joydeep Mukerji, credit analyst at S&P said:
Analysts, however, do not think a rollback of liberalisation policies is possible. Instead, the report may spur remedial action by the government.
Finance Minister Pranab Mukherjee yesterday rejected the report, promising a turnaround in India’s growth prospects in the coming months.
According to the finance ministry, “foreign institutional investors (FII) have reposed faith in the Indian economy and had already poured in $12 billion in the first five months of the current calendar year – the highest net FII inflow in the last five years for the corresponding period.”
In the first quarter, India’s economic growth fell to a nine-year low of 5.3 percent, as tighter monetary policy targeted at controlling inflation hurt domestic output.
India has a record trade deficit, the largest among the BRIC nations, and an inflation rate of more than 7 percent.