S&P maintains negative outlook on India's rating

Amid rupee sliding below 64 to a dollar, global agency Standard & Poor's on Tuesday said it will maintain negative outlook for the country as currency depreciation is adversely impacting investor confidence.

"We view the capital outflows and depreciating rupee as an indication of weakening investor confidence in India ... We maintain a negative outlook on India's BBB- sovereign credit ratings," S&P Senior Director Sovereign and International Public Finance Ratings (Asia-Pacific) Kim Eng Tan said in an emailed statement.

'BBB-' is the lowest investment grade and a downgrade would mean pushing the country's sovereign rating to junk status, making overseas borrowings by corporates costlier.

Referring to the recent measures announced by the government to restrict capital outflow, Tan said these "have also increased uncertainties among investors both foreign and domestic".

"If the uncertainty continues, business financing conditions could deteriorate further and investment growth could slow further".

In order to tame the sliding Rupee, the Reserve Bank and the government had on August 14 announced stern measures, including curbs on Indian firms investing abroad and on outward remittances by resident Indians.

S&P's comments come on a day when the rupee touched the record low of 64.11 to a dollar in intra-day trade today.

Moody's Investor's Service in its report today said the depreciating rupee is likely to inflate the fuel subsidy bill, weaken the credit quality of oil companies and put pressure on the fiscal deficit.

Earlier in May S&P had warned that it may downgrade India's sovereign rating to junk grade if the government fails to pursue reforms and check deterioration in fiscal and current account deficits.

S&P said its future credit rating action would depend upon the response of policymakers to the latest economic developments. India's long term growth prospects could weaken on a sustained basis, with negative implications for the sovereign credit fundamentals, it said.

"We view the capital outflows and depreciating rupee as an indication of weakening investor confidence in India. We believe this to be a result of the declining economic growth in the past two years and what some investors view as insufficient long-term policy response that could reverse the decline and revive investments," S&P said.

It added that investments continue to be stifled by inadequate infrastructure, rigidities in labour and product markets, and red tape, among other issues.

A sliding rupee, which is mainly on account of widening Current Account Deficit (CAD), will make imports costlier and fuel subsidy bill. The CAD, which is the difference between the inflow and outflow of foreign currency, had touched a record high of $88.2 billion or 4.8 per cent of GDP in 2012-13 fiscal.

Finance Minister P Chidambaram last week said that CAD will be contained at $ 70 billion or 3.7 per cent in the current fiscal and it is a red line which will not be breached.

Moody's has said despite previous price liberalisation in the petroleum sector, the subsidy bill is likely to rise due to depreciation, thus widening the government's deficit, which is also under pressure from slower revenue growth.

"We believe the currency will remain under pressure until the current account deficit narrows meaningfully, or capital inflows accelerate due to an improving growth outlook," Moody's said.