Pacific Money

S&P Issues Warning on Indian Economy

The ratings agency has ramped up the pressure on the already beleaguered economic authorities to act on growth.

S&P Issues Warning on Indian Economy
Credit: Financial Times photos via Flickr

Standard & Poor’s (S&P) the credit rating agency, fired a warning shot across India’s bows on Thursday. It starkly warned of a possible cut to the country’s (unsolicited) credit rating if “the government that takes office after the general election [next year] does not appear capable of reversing India’s low economic growth.”

Such a blunt warning did no favours to those long in the country’s equity markets as shares dropped for a  third straight session. The wide media play that the statement received will do nothing to help volatility for New Delhi.

S&P already has India on a negative outlook, and this latest statement has underlined that position. Equally, by giving a timeline (sometime shortly after the general election when any new economic policies are announced) and an underlying worry (the lack of growth), sounds more like a “We’ll wait and see, but…” rather than a hopeful message.

Almost exactly a month ago in an interview with the FT’s Beyondbrics blog, a representative of Moody’s also sounded a note of caution on India’s sovereign rating. Back then, Moody’s were mostly worried about inflation and the cost of food’s effect on the government’s budget due to its Food Security Bill, both of which remain concerns.

Earlier this week, it was the Reserve Bank of India (RBI) which captured the international financial headlines (not for the first time these last few months) when it announced new rules for foreign banks operating or wishing to operate in the country.

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Under the changes, if foreign banks start to operate in the country as “wholly owned subsidiaries” rather than the current arrangement of using branches, then they will receive “nearly” equal treatment as local lenders. Further details included mean that many of the larger foreign players active in the market– such as HSBC, Citibank and Standard Chartered – will indeed need to make the change due to regulatory requirements.

The reform serves as yet another achievement by star new RBI chief Raghuram Rajan. Yet the contrast between the positive reaction to the RBI rule changes earlier this week and the voice of caution heard from S&P’s again highlights that the most significant changes required by the South Asian giant are going to have to come from the government, not the central bank.