A day after Fitch lowered India's local currency outlook to negative, international rating agency Moody's said it was also worried about the reversal of India's fiscal situation due to high oil prices and the lack of policy adjustment by the government.
Moody's, however, said it was unlikely to change its investment grade rating to India's sovereign foreign currency rating or the domestic currency rating, which is below investment grade.
On Tuesday, Fitch had lowered India's long-term local currency outlook from stable to negative in a move that could make borrowings overseas more expensive and might also impact investment into the country.
It, however, left the sovereign, local currency and foreign currency ratings at BBB-, which indicates investment grade. The foreign currency outlook was stable.
"We have not decided to change the ratings Fitch's action is closer to what we have been saying. It is signalling that local currency rating should be lower than foreign currency ratings," Moody's vice-president and senior analyst Aninda Mitra said in a telephone interview from Singapore.
Mitra added that the high level of inflation, estimated at 11.89 per cent in June, had also reduced policy manoeuvrability. "This is another area of concern given that we are in the political season," he said.
The rating agency expected the combined fiscal deficit of the Centre and the states -- including off budget spending like oil and fertiliser subsidies -- to touch 10 per cent in 2008-09. It has estimated that the India economy will grow 7.5 per cent this year against 9 per cent last financial year.
Asked about inflation and the Reserve Bank of India's expectation of containing it at around 5.5 per cent, Mitra said, "There is more pent up inflation than anyone realised, especially RBI I do not know if that (5.5 per cent) is achievable but it is good to have a medium-term target."
He added that oil prices will hold the key to where India's fiscal situation is headed and added that the external sector is still strong.
Mitra said that the major concern stems from the fact that "true borrowings" will be higher than the number projected in the budget and the key debt ratio will be impacted.
On Friday, Standard & Poor's had also warned of adverse impact on India's sovereign ratings due to rising inflation and widening current account deficit.
It had said compensating the oil and fertiliser subsidies, the Rs 71,000 crore farm debt relief package and the implementations of the recommendations of the sixth pay commission could push up the combined deficit level 9 to 11 per cent.
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