S&P Surprise Move to Issue Downgrade Warning on India’s Sovereign Debt

An unforeseen warning by global ratings major S&P on the possibility of India losing its investment grade sovereign rating agitated investor sentiments on Monday, a day that started on a strong note for markets globally after the European leaders agreed to a 100-billion Euro bailout for the Spanish banking system.

The warning that India may be relegated to a junk bond status jolted Dalal Street investors and led to a 225-point fall in the sensex from its intra-day high. However, not everyone sees the warning as negative, institutional players who deal with FIIs, the most influential of the investor groups on the Street, feel the warning could turn out to be positive for the market and the country. “This is a warning to the government to pursue its economic agenda which will lead to faster GDP growth,” said Dharmesh Mehta, MD (institutional equity), Enam Securities. “After reading the logic behind S&P’s warning, I see this as a positive development for the economy and the market. This would push the government to move faster on reforms, with RBI helping through rate cuts,” Mehta said.

Several other top broking house officials and dealers echoed the same view and said for the current week and the next, there are two things that matter the most. First, the Greek elections on Sunday, which is being equated to a referendum to see if its people are willing to be in the Eurozone. And the other one is the monetary policy decision by RBI on Monday.

Expectations are that Greece would leave the currency block, which could be a problem for India as its throws the market into uncharted territory, but given low Indian inflation and lower crude oil prices, RBI would cut rates further, a positive for the market.

Usually, a cut in ratings by a global major leads to outflow of FII money both from the stocks and the bond markets.