Frown factor

Mumbai, Aug. 4: Moody’s Investors Service today warned that the pressure to cut India’s rating outlook would grow because of rising inflation and if the government was unable to come up with strong reaction to the worsening fiscal situation.

The international credit rating agency, however, stopped short of saying that it was immediately planning to lower the country’s outlook. Moody’s has given India an investment-grade “Baa3” foreign currency rating and Ba2 local currency rating with a stable outlook.

It said that though the risks confronting India’s economy had increased, it had not grown to the extent that the Baa3 foreign currency and local currency rating are “threatened”. Moody’s is the third rating agency to voice concern on India.

Earlier Standard & Poor’s (S&P) had warned that India’s rating might be brought down to speculative grade if the country was not successful in bringing down inflation and its fiscal and current account deficits. S&P now has an investment grade rating on the country.

However, Fitch went a step ahead when it revised India’s local currency outlook to negative from stable because of the government’s worsening fiscal condition and rising inflation.

“Higher oil prices and the lack of adequate fiscal policy reactions amid high pent-up price pressures are putting the burden of macro-economic adjustment on the monetary authorities,” Aninda Mitra, senior analyst with Moody’s Sovereign Risk Unit, said.

“As a result, policy as well as market interest rates could rise, and a sharp deceleration in growth may follow,” Mitra said.

Mitra made his remarks in conjunction with the release of a new Moody’s report on the outlook for India’s sovereign ratings.

In the report, he dwelled on the economic factors which drive the ratings as well as the reasons behind the two-notch differential between its Baa3 foreign currency rating and Ba2 local currency rating.

According to Mitra, political issues play a role in India’s fiscal problems. The report said that the government’s fiscal difficulties related partly to its inability to raise retail fuel prices and reduce the growing, off-budget fiscal cost of reimbursing downstream oil companies as part of its subsidies programme.