The document discusses Standard & Poor's decision to assign India a negative outlook while affirming its BBB- sovereign credit rating. It provides background on sovereign credit ratings and explains S&P's rationale for the negative outlook, citing India's high fiscal and current account deficits, slowing GDP growth, and challenges with fiscal consolidation. The summary discusses potential impacts of the negative outlook like increased chances of a downgrade, currency depreciation, market declines, and difficulty with overseas borrowing. It also examines India's economic challenges and risks of not addressing fiscal issues, as well as responses from Indian officials who see the outlook as a warning but not a cause for panic.

1. Standard & Poor’s Negative Outlook
Impact on Indian Economy & Financial Markets
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2012

2. Sovereign Credit Rating – What is it ?
• Credit rating evaluates credit worthiness of debt issuer
• A Sovereign credit rating is rating of sovereign entity –
a national government
• Poor rating indicate high risk of defaulting
• It is not base on mathematical formulas.
• Credit Rating Agencies use their experience and
judgment
• Sovereign credit rating indicates risk level of investing
environment of a country
• Sovereign rating takes political risk into account
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2012

3. S&P Rating update
• BBB- (One notch above “ Junk”)
• Stable Outlook
• BBB- affirmed
• Negative Outlook – 33% Chance of
Downgrade
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2012

4. Where are we ?
Lowest Investment Category
AAA
AA
A
BBB
BBB- ( India)
BB
B ,CCC , CC, C
D ( Default)
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2012

5. S&P Global Rating
Standard & Poor's Foreign Rating in April 2012
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6. Where are we ?
Lowest Rating in BRIC
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7. Negative Outlook- Rational
• High Fiscal Deficit
– Target for 2012-13 5.1% of GDP
– 2011-12 was 5.9 % very high against target of 4.6%
• High Current a/c deficit
– 3.7% of GDP in 2011-12
– 4.3% of GDP in Q3 2011-12 ( Highest since Balance of
payment crisis in1991)
• Lowest GDP Growth in last 3 Years
– 6.8% 2011-12 against 8.4% in 2010-11
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2012

8. Negative Outlook- Rational
• Slow pace of fiscal Consolidation
• Continued Inflationary pressure
• High Subsidy burden ( Fuel, Fertilizer)
• Governments policy reversal
– FDI in Multi brand Retail
• High Debt/GDP Ratio
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2012

9. Impact of Negative Outlook
• 1/3 Chance of Downgrade in next two years
• 60% of countries that see an outlook downgrade face a
ratings downgrade in 7 months
• If downgraded, India will be non investment
grade.
• Further depreciation of Indian Currency
• Overseas Borrowing will be difficult
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2012

10. Impact So Far ….
• Currency Depreciation
• Benchmark Index Down
• FII Net sale
• 10 Yrs Bond Yield Increased
– No Cool down despite of 50 Bps Cut by RBI
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2012

11. Impact So Far ….
15th April 11th May
1.03 NIFTY – 5207 4928
INR/Dollar – 51.42 53.64
1.02 RBI Reference Rate
1.01
1.00
0.99
0.98
INR/USD
0.97
Nifty
0.96
0.95
0.94
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2012

12. Impact So Far ….
FII Net Flow ( Equity+ Debt ) Source SEBI ( Rs in '000 Crores)
1.50
1.00
0.50
0.00
-0.50
-1.00
-1.50
-2.00
-2.50
23-Apr 24-Apr 25-Apr 26-Apr 27-Apr 30-Apr 2-May 3-May 4-May 7-May 8-May 9-May 10-May 11-May
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2012

13. Impact So Far ….
10 Year Bond Yield Since 10th April 2012
Source : www.bloomberg.com
No Impact of 50
Bps RateRate by RBI RBI
50 Bps Cut Cut by
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2012

14. Impact of S&P Rating Downgrade
• In Aug 2011, S&P cuts US Rating from
AAA to AA+
US Rating • One Notch down from Highest Safety
category
Downgrade • Dow plunges 634 points; NASDAQ, S&P
fall almost 7%
• No more Investment Category “Junk”
• FII’s Big sell off
If Downgrade • Capital Markets May hit lower circuits
India Rating • Increased bond Yield , Bond Prices fall
• Panic all around
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2012

15. State of Economic Dilemma
Limited Room for Increased
FII’s will avoid India
Policies borrowing costs
• Current A/c • Will dampen the • Lack of
Deficit interest in local confidence
• Weak Investment currency among FII’s
& Economic debt, which has • Weak global
Growth already investment
• High & Structural weakened on climate
Inflation + Fiscal other related • Policy
Deficit uncertainties paralysis, sticky
• Leaves No Room inflation and
for Policies slowing growth
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2012

16. State of Economic Dilemma
Further Depreciation Slows Economic Paralyzed
of Currency Growth Government
• FII’s Withdrawal of • Investor flows likely • UPA 2 is not
Funds ( net sell) to decrease facilitating
• High Oil import bill • not a favorable economic activity
• Further blend for investors , it is too busy fire-
depreciation in in India fighting scams
Currency will add • Downgrade creates • Has put off FII with
fuel to Inflation a vicious cycle recent Tax Polices
• Difficult to come • Post UP Election
out of it . Weakened
bargaining power
of Congress.
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2012

17. Can India Avoid Downgrade ?
Unstable
GDP Growth
Government
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18. Can India Avoid Downgrade ?
• Negative Out look is Wakeup call , still much better then peers
• Strong growth prospect and young population
• Indonesia and Philippines gained in investment rating due to
improved performance (so can we)
• Take Stringent Policy Decision
• Cut Subsidy Bill in Fuel, Fertilizer, Social Programs NREG
• Relax FDI in Banking, Insurance & Pension, Retail, Aviation
• Fast Track Implementation of GST, DTC
• Boost Investor Sentiment, More FII inflow
• Easing Interest rates further boost sentiment in Business
• Eventually high GDP Growth trajectory.
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2012

19. Risks
• Biggest Risk to Indian Economy is absence of Political
Consensus
• Implementation of key polices
• Opposition to reduce diesel subsidy, reversal of gold
duty, retro tax provision, GST rollback, FDI in retail rollback
• Un due Political Pressure from coalition parties.
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2012

20. S&P – Can we trust?
• Every Major crisis has been missed by the rating
agencies and in aftermath of every crisis they have
been very quick to downgrade – Montek singh
Ahluwalia deputy chairman PMEAC
• Assigned high rating to Latin America in 1980’s
especially at time when they were going bust
• They had positive rating for Asian economics when
they were going bust in 1997-98
• Euro crises – no downgrade
• They had not downgraded US in 2008 sub-prime crises
• They had not downgraded Lehman Brothers in 2008.
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2012

21. Various responses on Outlook revision
• No Need to Panic government is committed to economic reforms, it
should be taken as timely Warning – Pranab Mukhrejee Finance Minster
• Government should see this as a wake up call and address these issues –
CLSA Singapore
• Some concerns expressed by S&P will be resolved during the year. I would
expect S&P to reverse and perhaps upgrade rather than downgrade –
C Rangrajan PMEAC chairman
• A downgrade is likely if the economic growth prospects dim, external
position deteriorates, political climate worsen or fiscal reforms slow.-
Ogawa S&P
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22. Thanks
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