As India faces the prospect of being the first BRICS country to lose its investment-grade credit rating, investors have already delivered their verdict: to them, the country already trades at “junk”, which should temper any ensuing market reaction.
Credit default swaps suggest India is already a bigger investment risk than emerging markets such as Vietnam and more than double the risk of fellow BRICS Brazil, Russia, China, and South Africa.
Overseas portfolio investors have also been conditioned to low expectations for a government that has long disappointed on fiscal reforms.
Given its sizeable foreign exchange reserves and low overseas debt, a ratings downgrade would not trigger financial turmoil. Still, it would be humbling for a country with big aspirations to sit at the top table of emerging economies.
Standard & Poor’s was the first credit agency to cut India’s sovereign outlook to negative in April, followed by Fitch Ratings in June. Both have India at BBB-minus, the lowest investment-grade rating.
No big deal
Ratings agencies acknowledge certain strengths that mitigate against a downgrade. India has low external debts, including private-sector debt, and its $289 billion in foreign exchange reserves is enough to cover all of the country’s debt maturing over the next 12 months.
Some selling is inevitable if India’s credit rating is downgraded, partly reversing the foreign inflows this year and pressuring a current account deficit already at a record 4.5% of GDP.