India may become the first nation among the BRIC to lose its investment grade, Standard & Poor's said in a report on Monday, resulting in a decline in the country's stock market.
Because of slow economic growth and political roadblocks to economic policy making, India's rating could be at risk, the rating agency said in a report titled "Will India Be The First BRIC Fallen Angel?"
BRIC nations comprise of Brazil, Russia, India and China. Currently, India's 'BBB-' long-term sovereign rating is one notch above the speculative grade.
The government's reaction to potentially slower growth and greater vulnerability to economic shocks could largely determine whether the country can maintain an investment-grade rating or become the first "fallen angel" among the BRIC nations, it said.
"Setbacks or reversals in India's path toward a more liberal economy could hurt its long-term growth prospects and, therefore, its credit quality," S&P Credit Analyst Joydeep Mukherji said.
In April, the rating outlook of India was revised down to Negative from Stable, citing lower growth prospects as well as the risk that its external liquidity and fiscal flexibility may erode. The agency warned that there is one in three chances of a rating downgrade.
Moreover, it reflects the risk that Indian authorities may be unable to react to economic shocks quickly and decisively enough to maintain the country's current creditworthiness.
According to Mukherji, weakening political context for further reform, combined with economic deceleration, lifts the risk that the government may take modest steps backward away from economic liberalization in case of unexpected economic shocks.
Nonetheless, S&P said the Indian economy remains in much better shape to withstand this period of heightened global uncertainty than it was in the early 1990s, when it suffered a balance-of-payments crisis.
India's economy expanded 5.3 percent during the quarter ended March 2012, the slowest pace in nine years. The Chinese economy grew 8.1 percent during the first three months of this year, the weakest pace in nearly three years.
The leading indicators released by the Paris-based Organisation for Economic Co-operation and Development showed that activity in the Indian and Chinese economies are going to be below the long-term trend going forward.
For Brazil, the OECD indicator continues to signal a turning point with economic activity returning towards long-term trend but with a weaker intensity. In Russia, economic activity continued to remain above the long-term trend.
After the release of the S&P report, the Indian stock markets erased gains seen in the early trading hours that was underpinned by positive events in the euro area.
Following the news, the Indian rupee depreciated to over 55.80 against the U.S. dollar.
by RTT Staff Writer
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