Moody’s, which rates India Baa3, said in a report last month that expansion of food subsidies is credit negative as it will exacerbate the government’s weak finances. The company cut its senior unsecured debt and local-currency deposit ratings on State Bank of India, the nation’s largest lender, to Baa3 from Baa2 on Sept. 23. It also changed the outlook on its D+ financial-strength ranking to negative from stable, citing the worsening economy as a reason.
“The SBI downgrade may affect India through the equity channel as outflows will affect the rupee,” Vishnu Varathan, an economist at Mizuho Bank Ltd. in Singapore said on Sept. 24. “Some investors also perceive porous linkages between SBI and the sovereign,” renewing concern that India’s credit rating may be downgraded, he said.
Credit-default swaps insuring the bonds of the government- controlled State Bank, a proxy for the sovereign, rose 106 basis points last month to 365 in the biggest jump since 2008, according to data provider CMA.
India may have to draw $9 billion from its reserves to fund the current-account deficit, Chakravarthy Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said in a report released Sept. 13.
Options signal rupee swings will widen, boosting investors’ risk. The currency’s one-month implied volatility has jumped to 15.49% from this year’s low of 7.53% in April. The gauge of expected swings in exchange rates is quoted as part of options prices.
“India is not in a good place at all,” said UBS’s Baweja. “Given that a downgrade hasn’t happened so far and the economy is already on its knees, it’s difficult to know what the incremental negative could be from here. It could be massive capital flight from all the foreigners; that would certainly do it for many of these rating agencies.”