India’s rating may be cut: S&P

US credit rating agency Standard and Poor’s (S&P) on Wednesday warned that India still faces a “one-in-three” chance of a downgrade despite recent moves to open up the insurance, pension and multi-brand retail sectors to foreign investment. Sensex drops 162 pts on S&P downgrade warning

US credit rating agency Standard and Poor’s (S&P) on Wednesday warned that India still faces a “one-in-three” chance of a downgrade despite recent moves to open up the insurance, pension and multi-brand retail sectors to foreign investment — the boldest reforms proposals initiated by the UPA government since assuming power in 2004.

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%.