Rating Agency Fitch Lowers India to BBB-, Almost Junk Bond Rating
By arunr at 16 July, 2008, 8:46 pm
STORY HIGHLIGHTS
- The rating agency Fitch lowered India’s sovereign debt to BBB-, the lowest investment grade rating, near non-investment grade (junk bond) status.
- The Indian government’s fiscal position has worsened as the government spends more and issues debt; the budget deficit may increase from 2.8% in FY2008 to 4.5% in FY2009.
- Other ratings agencies may follow. Indian sovereign bonds and the rupee have fallen.
New Delhi — The sovereign debt of India is almost at junk bond levels. Fitch Ratings downgraded India’s local-currency debt outlook to negative from stable, while maintaining a BBB- grade, the lowest investment 
grade, one step above speculative — or junk — status. The move came close on the heels of a similar downgrade warning by Standard & Poor’s. India’s debt rating is the lowest among investment grade ratings: it is six notches below China and Japan, and one notch below Egypt, Morocco, and Namibia.
While the revision does not impact corporate borrowings, bankers believe the situation could change if other rating agencies too revise ratings. A flood of foreign money which came from positive ratings may flow out. Already, overseas funds have sold $6.8 billion more Indian shares than they bought this year, according to the Securities and Exchange Board of India, the capital markets regulator. For Indian companies, the cost of borrowing from overseas markets has already gone up.
Fitch downgraded the rating because it was concerned over fiscal mismanagement on account of rising subsidies, interest payments, and the Sixth Pay Commission-stipulated wage hike for government employees. Fitch forecasts the central government deficit may increase from 2.8% of GDP in FY08 to 4.5% of GDP in FY09. Bond issuances to oil and fertilizer companies by themselves will account for 2% of the GDP deficit.
“The revision to the local currency outlook is based on a considerable deterioration of the central government’s fiscal position in FY09 (April 08-March ’09), combined with a notable increase in government debt issuance to finance subsidies not captured in the budget,” said James McCormack, head of Asia sovereign ratings, Fitch.
An official at the Finance Ministry disagreed, saying “The fiscal deficit will be contained within the FRBM (Fiscal Responsibility and Budget Management) Act mandate of 3 per cent this year.” Yet the official gave no plans of how the Ministry would do so given the record spending.
Higher oil prices have raised India’s oil import bill dramatically over the past three years, and the merchandise trade deficit was the equivalent to 7.7% of GDP in FY08.
The current account deficit was much lower, at 1.5% of GDP, as services exports and remittance inflows remained robust. Fitch expects the trade balance to widen to 8.2% of GDP in FY09, but doesn’t expect the current account deficit to widen further. The trade balance is the amount a country receives for the export of goods and services minus the amount it pays for its import of goods and services. The current account is the trade balance plus the net amount received for domestically-owned factors of production used abroad. Hence, if an Indian owns an apartment in Toronto, the rent he receives is part of the current account but not part of the trade balance. In essence, the current account is a very broad measure of the trade balance where the income from domestically-owned factors used abroad are considered an export of factor services and the payments for foreign-owned factors used here are considered an import of factor services.
As a result of the ratings cut, India’s rupee declined by the most in two months. “All signals are negative for the rupee as of now,” said L. V. Prasad, a currency trader at IndusInd Bank Ltd. in Mumbai. “Oil is rising and stocks are down. Rupee traders are positioning themselves for more foreign-exchange outflows.” Also, the prices of its bonds fell as investors re-assessed their risk spreads.
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