Wednesday, April 25, 2012

Expert Views, S and P cuts India s outlook to negative


MUMBAI (Reuters) - Ratings agency Standard & Poor's on Wednesday cut India's outlook to negative from stable, citing its large fiscal deficit and expectations of only modest progress on reforms given political constraints, battering stocks, bonds and the rupee.
The lowered outlook jeopardises India's long-term rating of BBB-, which is the lowest investment grade rating.
There is a one in three chance of a downgrade to India's credit rating if external conditions continue to deteriorate, the ratings agency said in a statement.
(Read main story, S&P cuts India outlook to negative from stable, click http://in.reuters.com/article/2012/04/25/sp-cuts-india-outlook-negative-stable-idINDEE83O03V20120425)
COMMENTARY
RADHIKA RAO, ECONOMIST, FORECAST PTE, SINGAPORE
"The writing was on the wall given the country's weakening debt profile and sluggish investment climate. Focus yet again returns to the March budget disappointment as the government failed to undertake radical steps to cut subsidy spending, while FY12 deficit overshot estimates by a wide margin.
"Lack of clarity on tax provisions, especially proposals to retrospectively tax investment deals, weighed on sentiments in the aftermath.
"With the coveted investment grade now at risk, one can only hope this acts as a wake-up call for the government, with indications that administered fuel prices will be raised in Q2, a good starting point. Sustained improvement in the debt matrix will be necessary to avert an eventual downgrade."
A PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP, MUMBAI
"I am not surprised by the S&P action, though it is difficult to predict the timing as the opportunity of fiscal consolidation and reforms have been missed. If situation deteriorates so much, financial markets will reflect that and not really wait for any rating agency and we have seen this reflected in the way the rupee has weakened.
"From the Reserve Bank of India's point of view, it complicates the external balance picture as lot of investors will be constrained to invest if India falls below investment grade and there will be limited room on policy action if the rupee weakens further."
KUMAR RACHAPUDI, FIXED INCOME STRATEGIST, BARCLAYS CAPITAL, SINGAPORE
"For now, the markets are reacting negatively with USD/INR and INR-OIS moving higher and stocks lower. However, note that it is only a rating outlook change and not a rating change for now. Also as far as bond investments are considered, the limited foreign ownership of Indian bonds will help check the rise in yields because of the change in outlook.
"While the S&P action is negative on the margin, note that borrowing costs for companies are dependent on their individual credit strength. So unless borrowing costs for banks goes higher significantly, this action is unlikely to translate into wider spreads in general for the economy."
ARUN SINGH, SENIOR ECONOMIST, DUN & BRADSTREET, MUMBAI
"This action should at least now push the government into action by announcing new reforms or look to implement the already announced ones. Until then, we will see markets, including the currency, remaining under pressure.
"Key step here is to see how the foreign institutional investors take this action given the already present worries on economic and political factors. Risk premium for corporates borrowing abroad will have to rise as well."
MATT HILDEBRANDT, ANALYST, JPMORGAN, SINGAPORE
"It is not going to have a major impact when the sovereign has no external debt.
"First of all, it is concern about the current account deficit, and about the weakening investments and economic growth. Those seem to be the two biggest things driving the move. But look at the whole picture ... you have high and structural inflation and you still have the fiscal deficit. Overall, there are enough challenging factors for the policymakers right now."
DARIUSZ KOWALCZYK, ECONOMIST, CREDIT AGRICOLE CIB, HONG KONG
"This is not surprising given weakening of fundamentals in the past quarters, but markets are likely to react negatively, with weakening of the rupee and bonds prices.
"Domestically, I hear that exporters are not buying the INR as they see it weakening further, while importers have to sell. Also, foreign investment is being hampered by high FX volatility and reserve coverage of imports have deteriorated to multi-year lows, making the RBI more reluctant to intervene.
"I expect regulatory measures soon and they could provide temporary respite to INR. Rupee is vulnerable due to high twin deficits (fiscal and current account) and inadequate policy response and should fall further in the short term."
SAUGATA BHATTACHARYA, ECONOMIST, AXIS BANK, MUMBAI
"This (the S&P outlook downgrade) is a reinforcement of the various concerns that the government is trying to address. It is a negative signal, but I don't think foreign fund inflows will be significantly affected unless there is an actual ratings downgrade."
JONATHAN CAVENAGH, FX STRATEGIST, WESTPAC, SINGAPORE
"Net equity inflows into India stand at $9 billion year-to-date. This news combined with potential tax changes for foreign investors is a potentially potent mix for INR. Guess a re-visit to the 2011 USD/INR highs can't be ruled out."
SURESH KUMAR RAMANATHAN, REGIONAL RATES AND FOREIGN EXCHANGE STRATEGIST, CIMB INVESTMENT BANK, KUALA LUMPUR
"With the outlook negative, this is likely to put a strain on the currency and is on track to meet our Q2 target of 54.00 (to the dollar).
"The OIS curve is tighter as rates inch higher particularly in the front end. This is made worse as liquidity is tight, with repo borrowings rising to 1.18 trillion rupees above the comfort zone of RBI.
"The curve is likely to steepen and we see the front end continuing to see much of the action as market prices in the risk premium of ratings outlook into negative via paying on the rates."
SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI
"It has had a quick sentiment impact. It may have a bit of adverse impact on capital inflows. And borrowing costs of corporates may get affected because of outlook downgrade, but difficult to say how much. We are not really looking at a downgrade possibility right away.
"It wasn't as a bolt from the blue. A lot rationale which was put forth by Standard & Poor's for the negative outlook, was already known, like the worsening of the current account deficit, and slowing reforms, were practically known."
RAJEEV MALIK, ECONOMIST, CLSA, SINGAPORE:
"It's clearly a negative development, and as to the extent of the impact, it depends on the global risk appetite. The constructive way to look at this is that the government should see this as a wake-up call and address these issues. We know all the problems, we know the solutions."
MARKET REACTION
* The 10-year bond yield rose 4 basis points to 8.63 percent immediately after the action
* The rupee fell to 52.64 against the dollar from 52.48 beforehand
* The BSE Sensex fell 0.9 percent
(Reporting by MUMBAI Treasury and Markets teams; Editing by Aradhana Aravindan and Ranjit Gangadharan)

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