INTERVIEW - India's rating faces no significant pressure - S&P

HONG KONG Mon Jul 6, 2009 5:08pm IST

A view of the Indian parliament building on the first day of the budget session in New Delhi in this February 2006 file photo.  REUTERS/B Mathur

A view of the Indian parliament building on the first day of the budget session in New Delhi in this February 2006 file photo.

Credit: Reuters/B Mathur

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HONG KONG (Reuters) - India's BBB-minus sovereign rating, placed on negative outlook in February, does not face any significant rating pressure despite a sharply higher fiscal deficit unveiled by the government in Monday's budget, Standard & Poor's analyst Takahari Ogawa said.

Ogawa said the size of the revised fiscal deficit was within the expected boundary, but added he was disappointed with a lack of details in the budget on fiscal consolidation and privatisation plans.

The government said on Monday its 2009/10 fiscal deficit would widen to 6.8 percent of GDP, a 16-year high, as it stepped up spending on infrastructure and gave more help to farmers and the poor.

"I don't think downgrade pressures have increased -- it has only been a few months since we changed the outlook," Ogawa told Reuters in an interview after the budget for Asia's third-largest economy was unveiled.

Indian stocks fell and bond yields spiked in reaction to the new deficit figure, which was much larger than some investors had expected. Markets had expected the fiscal deficit to swell to up to 6.5 percent from 6.2 percent the previous year.

In February, Standard & Poor's cut its outlook on India's long-term sovereign credit rating to "negative" from "stable", citing an "unsustainable" deterioration in the country's fiscal position.

The ratings agency called India's weak fiscal position "the single-largest negative factor for the sovereign ratings."

But Ogawa said: "In terms of the size of the fiscal deficit there was no surprise (in Monday's budget). Yes, this is within the boundary of our expectation. "

Fitch Ratings, which has a BBB-minus rating on India's foreign and local debt, said in February India's fiscal deficit and government debt ratios are outliers compared with those of its peers.

It said India's external financing burden was modest while retaining the stable outlook for its foreign debt rating but cutting its outlook on local rating to negative from stable.

S&P's Ogawa said he had hoped for more details in the budget on fiscal consolidation and government plans to selldown stakes in state-run firms, which would reduce budget pressures.

"How the government intends to handle fiscal consolidation is one of the important issues which at this stage is not answered yet," he said.

Ogawa his agency would focus on the contents of the 13th Finance Commission panel report and views on Fiscal Responsibility and Budget Management Law.

However, he did not say whether a rating action would follow after the budget.

Moody's has an investment-grade Baa3 foreign currency rating and a junk Ba2 domestic rating for India. The outlook is stable.

The agency has warned that India's rating could be lowered if it fails to progress on fiscal consolidation or if there was a sustained reversal of foreign capital inflows.

Meanwhile, market analysts said the action of rating agencies would depend on the government's intention to cut its fiscal deficit.

"If they just announce a large fiscal deficit without a committment to a control in fiscal performance, there is a risk of a sovereign downgrade," said Sebastien Barbe, head of em research and strategy, Calyon, Hong Kong.

(For more news on Reuters Money click in.reuters.com/money)

(For full coverage on Budget 2009 click here)

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