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Morgan Stanley downgrades India ratings

Global financial services provider Morgan Stanley has downgraded India's ratings in its latest report on global emerging markets.

The report has maintained its underweight call on India and reduced India's ranking from 15 to 16.

At a time when Morgan Stanley in its Asia/Global Emerging Markets Equity Research report has raised its equity weighting to its highest level since April 2009; India got a place in the bottom five.

"Our conviction that emerging markets will outperform developed markets in 2H (second half of the year) is increased by recent events like the EU sovereign debt problems and a sluggish US," the report says.

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Morgan Stanley downgrades India ratings

India shares the underweight category with Mexico, Taiwan, Thailand, Colombia, Chile, Hungary and Peru.

Interestingly, all other BRICS countries are far better placed than India.

China continued to top the ranking table followed by Russia at No. 2 while Brazil is at fourth level in the score card and South Africa improved fast to 6th position from its earlier 10th position.

"Weaker growth in the developed world will bring further downside risk to external demand.

"Moreover, net export remains a key driver of growth for some of the countries within the region, accounting for more than 30 per cent of our estimates for 2011 GDP growth for highly export-oriented economies such as Singapore, Taiwan and Hong Kong," the report adds.

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Morgan Stanley downgrades India ratings

However, in case the growth in the top developed economies is at a major risk in the current year, the externally oriented economies such as Hong Kong, Korea, Singapore and Taiwan would be more affected while China, India and Indonesia would be less affected.

According to the report, some countries appear to have room for a policy of measured financial expansion to boost growth. China's fiscal policy response will be the key.

"We believe that China still has fiscal room to respond in order to contain the downside risk to growth for the region," Morgan Stanley says in its report.

However, in case of India, the situation looks grim.

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Morgan Stanley downgrades India ratings

"India may not be able to respond given the starting point of a high fiscal deficit. In India, the government may focus more on boosting private sector confidence through policy reform," the report further adds.

Among the top 25 stocks of MSCI EM Mega Cap Stocks, only one Indian name made it to the list - Infosys Ltd.

Morgan Stanley is overweight on the Indian IT giant as it has put a target of Rs. 3,630 against the current share price of Rs. 2,374.