S&P says India may be first in BRIC to lose investment grade

June 11 (Bloomberg) -- India may become the first BRIC nation to lose its investment-grade credit rating, Standard & Poor’s said, citing slowing growth and political roadblocks to economic policy making. The rupee weakened and stocks fell.

“Setbacks or reversals in India’s path toward a more liberal economy could hurt its long-term growth prospects and, therefore, its credit quality,” Joydeep Mukherji, an analyst at Standard & Poor’s in New York, said in a statement today. India is rated BBB- by S&P, one level above junk and the lowest in the BRIC group, which also includes Brazil, Russia and China.

Indian gross domestic product rose 5.3 percent last quarter from a year earlier, the least in nine years, stoking concern the nation’s economic prospects have deteriorated as policy gridlock deters investment and Europe’s debt crisis crimps exports. S&P lowered India’s credit outlook to negative from stable in April, contrasting with ratings upgrades in Asian nations from Indonesia to the Philippines in recent months.

“It’s another warning signal reflecting weakening growth fundamentals, and if it happens it may have a negative impact on inflows,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. “The government urgently needs to take steps to reverse this negative spiral.”

The rupee fell 0.5 percent to 55.73 per dollar at the local time close, while the BSE India Sensitive Index ended down 0.3 percent. The currency has slumped 20 percent in the past year. The yield on the 8.79 percent note due November 2021 declined three basis points, or 0.03 percentage point, to 8.33 percent.

Downgrade Scenario

“Fiscal slippage, combined with persistently high inflation, could further weaken investor confidence,” S&P said in a linked report. “Both the government’s debt burden and fiscal flexibility could continue to erode, in step with rising external vulnerability because of higher trade and current account deficits. India’s credit quality would suffer under such a scenario, and a downgrade could result.”

Prime Minister Manmohan Singh’s government is facing one of its most challenging periods since taking office in 2004. The administration is grappling with a trade deficit that reached a record $184.9 billion in the fiscal year ended March, the widest BRIC budget shortfall and an inflation rate of more than 7 percent.

The prime minister defended India’s record last month, saying its gross domestic product rose at one of the fastest paces in the world last financial year.

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