The warning came even as the World Bank cut India’s growth forecast for the fiscal to 6% from an earlier estimate of 6.9%.
“The negative outlook signals at least a one-in-three likelihood of a downgrade of the sovereign rating on India within 24 months,” S&P analysts Takahira Ogawa and Elena Okorochenko said in a note.
The effects of the announcement were immediately visible: The Sensex tumbled by 162 points to close at 18,631.10 on across-the-board selling and the rupee fell below the 53-mark.
Despite the rush of reform measures in the past few weeks, the probability of a downgrade remains unchanged since April, when S&P had raised questions over India’s economic management and policy gridlock.
The agency also maintained India’s rating at BBB-, which is only a notch above “junk”. A downgrade would mean the Indian government would have to pay higher interest rates on its public borrowing, which could potentially erode the country’s attractiveness as a global business hotspot and investment destination. The S&P downgrade threat came a day after the International Monetary Fund (IMF) slashed the country’s growth forecasts for 2012 to 4.9%.
“A downgrade is likely if the country’s economic growth prospects dim, its external position deteriorates, its political climate worsens or fiscal reforms slow,” the credit rating agency said. On Monday, finance minister P Chidambaram had said India will soon unveil a “credible and feasible” five-year fiscal consolidation roadmap.