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S&P downgrades India outlook, markets hit

business Updated: Apr 25, 2012 13:47 IST

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.

"The outlook revision reflects our view of at least a one-in-three likelihood of a downgrade if the external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow in a weakened political setting," S&P credit analyst Takahira Ogawa said in a note.

India's 10-year bond yield rose 4 basis points to 8.63%, while the rupee weakened to 52.64 against the dollar from 52.48 before the action.

Stocks were also hit, with the main BSE index down 0.9%.

India's fiscal deficit swelled to an expected 5.9% of GDP in the fiscal year that ended in March, far above the government's 4.6% target.

Many economists believe New Delhi will have a tough time hitting its target of cutting the deficit in the current fiscal year to 5.1% of GDP, given a hefty subsidy burden and a weakened government that has failed to push through significant reforms.

The general elections looming in 2014 are expected to limit the prospects for significant reforms that would improve the investment climate and India's fiscal position.

"The writing was on the wall given the country's weakening debt profile and sluggish investment climate," said Radhika Rao, economist at Forecast Pte in Singapore.

"With the coveted investment grade now at risk, one can only hope this acts as a wake-up call for the government," she said.

Moody's has a Baa3 rating on India, while Fitch rates India BBB-. Both are also the minimum investment grade ratings. Moody's in December issued a stable outlook for India.