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No Need For Panic: Mukherjee

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Finance Minister Pranab Mukherjee said there was "no need for panic" after the rating agency Standard & Poor's downgraded the country's outlook from stable to negative on Wednesday.

India is likely to pass some financial reforms in the current session of Parliament, which started on Monday, he added.

"There is no need for panic," Mukherjee told reporters. "The situation may be difficult, but we will be surely able to overcome (it)."

A Finance Ministry official added India will take "corrective measures", in reacting to the rating agency Standard & Poor's downgrade.

The official, who declined to be named, did not elaborate on the measures.

But Parliamentary Affairs Minister Pawan Kumar Bansal told reporters the government hoped to get lawmaker approval in the current session of Parliament for the insurance amendment bill, which initially proposed to raise foreign direct investment limit to 49 per cent from the current 26 per cent.

It is unclear whether the government would be able to keep the proposed increase in the FDI limit in the final amendment.

Further, Standard & Poor's said India's headline inflation may not show much downward movement because of structural issues and this could be a factor when the agency reviews its sovereign ratings in the next two years.

Expert Views
The lowered outlook jeopardises India's long-term rating of BBB-, which is the lowest investment grade rating.

There is a one in three chance of a downgrade to India's credit rating if external conditions continue to deteriorate, the ratings agency said in a statement.

"The writing was on the wall given the country's weakening debt profile and sluggish investment climate. Focus yet again returns to the March budget disappointment as the government failed to undertake radical steps to cut subsidy spending, while FY12 deficit overshot estimates by a wide margin," Radhika Rao of Forecast PTE, Singapore said.

"Lack of clarity on tax provisions, especially proposals to retrospectively tax investment deals, weighed on sentiments in the aftermath. With the coveted investment grade now at risk, one can only hope this acts as a wake-up call for the government, with indications that administered fuel prices will be raised in Q2, a good starting point. Sustained improvement in the debt matrix will be necessary to avert an eventual downgrade."

According to A Prasanna, ICICI Securities, Mumbai: "I am not surprised by the S&P action, though it is difficult to predict the timing as the opportunity of fiscal consolidation and reforms have been missed. If situation deteriorates so much, financial markets will reflect that and not really wait for any rating agency and we have seen this reflected in the way the rupee has weakened.

"From the Reserve Bank of India's point of view, it complicates the external balance picture as lot of investors will be constrained to invest if India falls below investment grade and there will be limited room on policy action if the rupee weakens further."

Kumar Rachapudi of Barclays Capital, Singapore said,"For now, the markets are reacting negatively with USD/INR and INR-OIS moving higher and stocks lower. However, note that it is only a rating outlook change and not a rating change for now. Also as far as bond investments are considered, the limited foreign ownership of Indian bonds will help check the rise in yields because of the change in outlook.

"While the S&P action is negative on the margin, note that borrowing costs for companies are dependent on their individual credit strength. So unless borrowing costs for banks goes higher significantly, this action is unlikely to translate into wider spreads in general for the economy."

Arun Singh, a senior economist at Dun & Bradstreet, Mumbai added: "This action should at least now push the government into action by announcing new reforms or look to implement the already announced ones. Until then, we will see markets, including the currency, remaining under pressure.

"Key step here is to see how the foreign institutional investors take this action given the already present worries on economic and political factors. Risk premium for corporates borrowing abroad will have to rise as well."

Market Reaction

  • The 10-year bond yield rose 4 basis points to 8.63 per cent immediately after the action

  • The rupee fell to 52.64 against the dollar from 52.48 beforehand

  • The BSE Sensex fell 0.9 per cent