Moody's to now review India's sovereign ratings

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After lowering the outlook for India's banking industry, credit rating agency Moody's is likely to review the country's sovereign ratings on Tuesday, amid a slowdown in reforms and growth, with high inflation and fiscal deficit, analysts said.

"Definitely, there are causes of concerns -- inflation is out of control, the fiscal deficit target is unlikely to be met and now the growth is slowing down," said Sanjeev Krishan, executive director at PricewaterhouseCoopers (PwC).

"But any downgrade will be premature at this stage," Krishan told IANS, pointing out that the current rating -- which is not exactly quite positive -- will continue given the prevailing economic situation and the overall domestic and global outlook.

Moody's has assigned India 'Baa3' rating, which is the lowest in the investment grade.

Officials from the US-based Moody's are likely to hold talks with officials of India's finance ministry here to discuss the overall economic scenario as well as the sovereign ratings, a senior bureaucrat in North Block said, requesting anonymity.

The review is scheduled Tuesday. Earlier, the agency had downgraded its outlook on India's banking system to 'negative' from 'stable' in the report released Nov 9.

"It is a good wake up call. Banks have a role to fund growth but they have to take care of their balance sheets. There is a definite challenge. Looking at what is happening to airline, telecom and other sectors, banks have to be careful in lending," Krishan said.

Ratings downgrade makes borrowings costlier for the country and its industry. Moody's had already issued a warning on India's economic outlook when it downgraded the rating of 15 commercial banks.

"India's economic momentum is slowing because of high inflation, monetary tightening, and rapidly rising interest rates," Vineet Gupta, Moody's vice president and senior analyst, had said.

"At the same time, concerns have emerged over the sustainability of the recovery in the US and Europe, and rise in the borrowing program of the Indian government, which could drain funds away from private credit market."

Krishan said the government in a catch-22 situation over inflation and growth. "It's a difficult zone. On the one hand the government is struggling to tame prices and and meet fiscal deficit targets. On the other, a stimulus is needed to push growth. But that will worsen the situation of inflation and deficit," he said.

"This could prompt Moody's to downgrade ratings." In 2010, Moody's upgraded India's local currency government bond rating by a notch to 'Ba1' from 'Ba2'. Yet, India's local currency bonds remain below an investment grade rating.

Analysts fear any ratings downgrade or negative comments now would send the wrong signals.

"A ratings downgrade will definitely impact the market. People start feeling unsafe about the country. Of course, some people will have long-term view, but those who have short-term view will definitely pull back," Krishan said.