India Rating May Be Cut on Fiscal Concerns, S&P Says

By Kartik Goyal and Cherian Thomas

July 11 (Bloomberg) -- India's credit rating may be cut to ``speculative grade'' if faster inflation and higher government spending ahead of next year's election impair the budget deficit, Standard & Poor's said.

India's long-term local currency debt is rated BBB- by S&P, the lowest investment grade. A one-notch drop in its ranking would place Asia's third-largest economy on par with Indonesia, El Salvador and Guatemala.

``Political compulsions may make it difficult for the government to take timely measures to staunch fiscal or monetary slippages,'' S&P analyst Takahira Ogawa said in an e-mailed statement today. ``Failure to respond adequately to negative developments could point to a sustained deterioration in macroeconomic stability and increase the probability that the government's ratings could be lowered to speculative grade.''

The risk of a downgrade comes just 18 months after India was lifted to the investment category by S&P for the first time since 2002. A lower rating may deter foreign investors and make it more expensive for Indian companies to raise money, slowing growth in the $912 billion economy.

``A rating downgrade on India will be detrimental for companies' investment plans,'' said Amandeep Chopra, who helps manage the equivalent of $6.3 billion of stocks and bonds at UTI Asset Management in Mumbai. ``It will further widen the cost of borrowing for companies.''

To contact the reporters on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net. Cherian Thomas in New Delhi at cthomas1@bloomberg.net