India Output Growth Slumps, S&P Says Rating May Be Cut to Junk
By Cherian Thomas and Kartik Goyal
July 11 (Bloomberg) -- India's industrial production grew at the slowest pace in more than six years and Standard & Poor's said it may cut the nation's credit rating to junk if the economy deteriorates further.
Stocks fell after the government released figures showing industrial output gained 3.8 percent in May from a year earlier, almost half the median forecast in a Bloomberg survey. Bonds dropped after S&P said its BBB- ranking on India's long-term local currency debt may be lowered to ``speculative grade.''
``A rating downgrade would be a blow to India,'' said Ramya Suryanarayanan, an economist at DBS Bank Ltd. in Singapore. ``Heading in that direction isn't good as investors are already panicking about inflation, growth and fiscal prospects.''
Foreign investors, who bought a record $17.2 billion of Indian stocks last year, are now fleeing Asia's third-largest economy amid the fastest inflation in 13 years and the weakest economic growth since 2004. Wholesale prices jumped 11.89 percent in the last week of June, threatening to further undermine support for Prime Minister Manmohan Singh's government as it heads toward elections due by May 2009.
The benchmark Sensitive index dropped 0.3 percent to 13891.33, on the Bombay Stock Exchange at 11:50 a.m. in Mumbai. Overseas investors have sold a net $6.56 billion of Indian stocks and the rupee has slid 8.3 percent since January.
The yield on the key 10-year government bonds climbed 7 basis points to 9.49 percent, while rupee gained 0.3 percent to 42.9275 against the dollar.
`Policy Dilemma'
Today's data ``emphasizes the policy dilemma facing the Reserve Bank of India - how much should it worry about the slowdown in industrial growth and how much the strength of inflation?'' said Robert Prior-Wandesforde, an economist at HSBC Group Plc in Singapore.
India's central bank raised interest rates twice last month and ordered lenders to set aside more money as reserves, pursuing a tight monetary policy it started in 2004 to check inflation. Governor Yaga Venugopal Reddy and his Reserve Bank colleagues next meet on July 29.
Prime Minister Singh's government spent 1 trillion rupees ($23 billion) in the year to March 31 on food, fertilizer and oil subsidies, to mitigate the impact of surging global costs of crude oil and other commodities on India's 1.1 billion people.
The government hasn't succeeded in reining in prices, causing Prime Minister Singh's Congress party to suffer nine electoral setbacks in the past 11 state polls. To win back support, the government wrote off $17 billion of farm debt in the last four months and is now drawing plans to raise salaries of 4 million civil servants.
Budget Deficit
That may put pressure on India's budget deficit, said S&P, which rates the country's ability to repay debt at the lowest level in the investment grade.
``Political compulsions may make it difficult for the government to take timely measures to staunch fiscal or monetary slippages,'' S&P analyst Takahira Ogawa said in an e-mailed statement today. ``Failure to respond adequately to negative developments could point to a sustained deterioration in macroeconomic stability.''
Finance Minister Palaniappan Chidambaram aims to narrow the deficit to 2.5 percent of gross domestic product in the year to March 31 from 3.1 percent in the previous year.
The risk of a credit downgrade comes just 18 months after India was lifted to the investment category by S&P for the first time since 2002. A one-notch drop in its ranking would place India on par with Indonesia, El Salvador and Guatemala.
``India's credit profile has worsened in the past twelve months but we believe the upside and downside risks to its BBB- rating are currently balanced,'' Ogawa said. ``This assumes, however, that the reasons for credit deterioration are temporary. If we conclude that they are longer lasting, India's credit ratings could be lowered again to speculative grade.'' |
