S&P Warning to downgrade India rating – How an investor gets impacted?
Last week, S&P warned India that it would downgrade its Sovereign rating to “Junk” status. It indicated that Indian Government failed to keep the momentum going on reforms and containment of the deficits. In this article, we would discuss about what happens if S&P downgrades India rating and how the country or an investor would get impacted due to this.
What are credit rating agencies?
Credit rating is a credit worthiness of an individual or company or Government. It is based on the history of borrowings and re-payments based on the availability of assets and its liabilities. Credit rating agencies rate countries sovereign ratings. They analyses credit worthiness of country’s government. It takes into account the economic conditions and volume of foreign, public and private investments, its capital markets and foreign currency reserves it is holding. There are several credit rating agencies which rate countries sovereign ratings and top rating agencies are Standards and Poors (S&P’s), Moody’s and Fitch. These operate out of US.
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What is India’s current credit rating and what is the threat now?
S&P has rated India as “BBB-“, means negative outlook. S&P has warned now, that it would further reduce it to “Junk” status.
What is the “Junk” status?
If the rating is “Junk” status, means there is an element of risk if anyone is invested in Indian companies and risk for investments in India.
What are the impacts of ratings downgrade for India?
While there are several impacts due to the rating downgrade for India, major ones are indicated below:
Increase in interest rates: If the rating is downgraded to “Junk”, then investors from outside India would charge high interest rate as they are taking some “risk”.
Borrowing cost would increase: Indian companies, which want to attract foreign investments, have to bear the higher borrowing cost due to this downgrade. Means, Indian company’s profits would get reduced with this downgrade.
Mandate from some countries not to invest in junk status countries: There are several countries which mandate their investors not to invest in “Junk” status countries. This would reduce the inflow of investments to India.
Impact for FII investments: Foreign Institutional Investors (FII’s) would not come forward to invest in Indian stock market. Moreover they would try to pull money from stock market due to this downgrade. Stock market may crash and investors would lose their money.
Rupee value may fall: There is a possible impact on currency markets and Rupee value may fall.
Conclusion: It is not scary situation as this moment, but investors need to keep an eye about S&P movements on downgrade. Though the downgrade may not happen now, an investor should be aware of the impact so that we can take necessary steps to diversify portfolio across various investment options to reduce the risk.
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Suresh
S&P Warning to downgrade India rating – How an investor gets impacted?
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Mr.Suresh Thank You for the Information about S&P,Even the Investors should be vigilant with Investing Mutual Funds also and can you please us give any link about S&P ratings where invetors see the uncertainity of the event in S&P RATINGS…
Regards
prashanth
Hi Prashant, it is availble at http://www.standardandpoors.com/ratings/sovresearch/en/us under this check the tab SOVEREIGN RATINGS, HISTORIES, AND RATING LIST