In A clear indication that foreign investors have effectively discounted the remaining months of the UPA government and are focused on how the Lok Sabha polls play out, Standard & Poor’s Thursday warned that India could slip from investment to junk grade after the elections if the new government “does not appear capable of reversing India’s low economic growth”.
The stark comments from the world’s largest credit rating agency came two days after a Goldman Sachs research report said that “even though the actual general election outcome is uncertain, the market could trade this favorably over the next 2 quarters”.
S&P’s India sovereign rating report also said that its rating announcement will be made only after the general elections “when the new government has announced its policy agenda”.
This is a departure from its usual practice of announcing the rating in April.
The new S&P timetable will accordingly stretch the timing to at least June 2014. For the present, it has retained the rating for India at the bottom rung of investment grade but with a negative long-term rating outlook.
“If we believe that the agenda can restore some of India’s lost growth potential, consolidate its fiscal accounts, and permit the conduct of an effective monetary policy, we may revise the outlook to stable. If, however, we see continued policy drift, we may lower the rating within a year,” S&P said.
Among the positives for the economy, S&P is upbeat on the leadership of RBI Governor Raghuram Rajan for the financial sector. “We expect the sector, under the new leadership in the central bank to be gradually liberalized and a steady disinflationary environment to emerge,” the report said.
In a similar report, Nomura noted that it is the “possibility of positive surprises on the political front” which have reignited the bullish sentiments in the markets.
The Goldman Sachs report said, “politics is now trumping economics and has expressed optimism over a possible political change, led by BJP’s prime ministerial candidate Narendra Modi coming to power”.
A Barclays note on the S&P commentary said the agency has ruled out a downgrade before the national elections but has pinned everything on them. “S&P has said that if the new government engages in structural reforms to stem the drop in economic growth, then the risk of a downgrade would be lower”.
The rating agency’s comments sent the rupee down to a five-week low of 62.41 to a dollar compared