NY Times: “Since Standard & Poor’s warned Monday that India could be the first among the BRIC nations to lose its investment grade rating, politicians in India have moved quickly to discount the report.
Finance Minister Pranab Mukherjee “rejects” the report, the ministry said in a statement, which added that there are “several positives” for the Indian economy in the future. Rajkumar Dhoot, a member of Parliament and head of an industry trade group, referred to the report as “drawing room talk,” while Veerappa Moily, the minister of corporate affairs, said “S&P can not speak like this,” the Press Trust of India reported.
The criticism of Standard & Poor’s is overlooking an important point, analysts say. Whether politicians and industry leaders agree with the rating agency or not, a downgrade to so-called ‘junk’ status, could have very serious, very negative connotations.
“We shouldn’t ignore foreign rating agencies, either right or wrong,” said Vikram Limaye, deputy managing director at the Infrastructure Development Finance Company. “We should take their concerns into account. It is incumbent upon us to explain why their fears are misplaced or exaggerated in a reasonable way. Dismissal will not get us anywhere.”
A rating downgrade to junk status would mean that there would be an increase in the overseas borrowing costs for Indian companies and the country’s ability to attract foreign investment would be considerably diminished.
“This could have a major impact on overall fund flows, which rely heavily on international ratings,” said Dipen Shah, who leads fundamental research at Kotak Securities. “While the overall international debt is not so alarming as a proportion of the G.D.P., India needs a lot of capital flows to cover up its balance of payment deficit.”
While the cost of borrowing will increase, India’s borrowing capability will also be materially reduced, as certain investors who only invest in investment-grade paper will shun India.”
via What Happens if India Is Downgraded to ‘Junk’? – NYTimes.com.
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