India's sovereign ratings may turn negative: Moody's

The sovereign ratings outlook for India may turn negative, from stable currently, if the country's fiscal policy fails to check external shocks like crude prices or aggravates the inflation concerns, global rating agency Moody's warned on Monday.

Moody's warning comes within weeks of another global agency Fitch downgrading India's foreign currency credit outlook from 'stable' to 'negative'.

"If the fiscal policy response remained inadequate amidst heightened external shocks or resulted in an intensification of domestic inflation, then ratings pressure for a change in India's sovereign ratings outlook -from 'stable' to 'negative' - would increase," a Moody's report said.

Less than a week after the Reserve Bank hiked the key policy rate, followed by the commercial banks increasing the retail interest rates by up to 100 basis points, Moody's on Monday said there was possibility of further rise in borrowing cost.

"Policy as well as market interest rates could rise, and a sharp deceleration in growth may follow," it said.

The report cautioned that higher oil prices and the lack of fiscal policy reactions amidst high pent-up price pressures are putting the burden of macroeconomic adjustment on the monetary authorities.

The agency said, the risks confronting India's economy have grown, but not yet to the extent that the government's Baa3 foreign currency and Ba2 local currency ratings are 'threatened'. The Baa3 denotes investment grade while Ba2 relating to local currency reflects non-investment grade.

The downgrading from stable to negative makes debts raising costly in the international market.

With inflation hovering around 12 per cent and elections due in less than year's time "the outlook for reforms remains uncertain, it said.

Nuclear deal may boost India's ratings

Signing of the nuclear deal with the United States may boost in the global financial market India's credit worthiness which, otherwise, faces prospects of turning 'negative' from 'stable', according to Moody's assessment.

"By limiting India's dependence on imported hydrocarbons and strengthening as well as diversifying its power generation capabilities, the nuclear deal could offer medium-term support to the ratings," the global agency said.

However, it felt that it was not clear whether the deal may materialize quickly or smoothly enough to offset prolonged fiscal policy shortcomings.

It also said the support factor to credit rating "will be weighed against more imminent challenges that are derived from external shocks and lack or a more prudent, flexible and resilient fiscal framework."

Higher oil prices and lack of fiscal policy response are putting the burden of macroeconomic adjustment on monetary authorities.

This declaration in fiscal situation may force the country's sovereign ratings from 'stable' to 'negative', Moody's warned.

Having won a confidence motion in Parliament, the coalition government has also received for India, the crucial International Atomic Energy Agency (IAEA) approval for the safeguard agreement.

The agency said the reluctance to absorb the oil price shock and not regard as a significant above the-line fiscal event have led to the Reserve Bank of India stepping in with foreign exchange reserve to smoothen out the volatility.