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Junk rating for India is a done deal

CNBC reported that the cut in India’s credit rating outlook to negative by ratings agency Standard and Poor’s has prompted market watchers to say that it is only a matter of time before India gets downgraded to junk status given its poor record in managing fiscal problems.

Ms Anita Yadav, Managing Partner at corporate bond brokerage and asset management firm, SJ Seymour Group, told CNBC on Thursday that “I won’t be surprised if the S&P downgrade actually happens. It won’t happen in the next 12-18 months because the data that S&P looks at are unlikely to change materially in the next year, (but) I expect it to take place closer to 24 months.”

Ms Rohini Malkani, an economist at Citigroup in Mumbai, agrees that odds of a rating downgrade are “high,” as India will most likely meet the conditions outlined by S&P for the downgrade. These include deterioration in the country’s balance of payment position, diminishing growth prospects and slow progress on fiscal reforms in a weakened political setting. She said “The current political gridlock and parliamentary elections in 2014 should result in only modest progress on fiscal reforms. We expect the center’s deficit target of 5.1 percent to slip to 5.5 percent for 2012-2013.”

Mr Cyrus Daruwala, Managing Director at advisory firm for financial services companies, IDC Financial Insights, says many institutional investors already interpret India’s current credit rating as “junk status” based on the current state of its financial sector and economy. He said “(Indian) stocks have been declining, so has the rupee, the country has a wide current account deficit, growth is slowing… India has no light on the horizon,” he said.

Market watchers agree that Wednesday’s downgrade will have an extended, negative impact on sentiment, particularly among retail investors, as well as the rupee.

The ratings agency on Wednesday cut India's outlook citing its large fiscal deficit and expectations of only modest progress on reforms given political constraints. The lowered outlook jeopardizes India's long-term rating of BBB-, which is the lowest investment grade rating. It assigned a one-in-three chance to an actual downgrade within the next 24 months.

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