MUMBAI Standard & Poor's said on Thursday it will review India's rating once a new government due to be elected next year lays out its policy agenda, reducing the prospect of a destabilising downgrade to below investment grade ahead of the polls.
That could delay the next review until after May 2014, by when India is due to hold a general election, although S&P added it could move earlier should the country's fiscal or external standing deteriorate.
The credit rating agency said it would cut India's current rating, at the lowest investment grade, should the next government fail to provide a credible plan to reverse low economic growth.
Alternatively, the agency said it may revise India's outlook back to "stable" from the current "negative", should a new government have an agenda to restore growth, improve finances, or allow the implementation of an effective monetary policy.
S&P is the only one of the three major credit agencies with a "negative" outlook on India. The country is rated "BBB-minus" or its equivalent by these agencies, meaning any cut would lead into so-called junk territory with any downgrade.
"If we believe that the agenda can restore some of India's lost growth potential, consolidate its fiscal accounts, and permit the conduct of an effective monetary policy, we may revise the outlook to stable," S&P said in a statement.
"If, however, we see continued policy drift, we may lower the rating within a year."
S&P cut its outlook on India to "negative" in April last year.
A delay in the review of India's ratings could provide a reprieve to the ruling Congress Party which has long argued against a downgrade. Fitch Ratings revised its outlook to stable in June on the back of steps taken by the government to contain the budget deficit.
Still, shares fell on Thursday while the rupee weakened against the dollar, as investors remain concerned about the prospect of a downgrade.
"We think this commentary is marginally positive," Barclays said in an email to clients.
"We think S&P has effectively given the next government a window to usher in economic reforms."
India's economic growth slowed to a decade low of 5 percent in the fiscal year that ended in March. Analysts have widely attributed the slower growth to the government's lack of decisive policy action and high interest rates.
India's current account and fiscal deficits are also seen as leaving it vulnerable to foreign investor sell-offs, most recently in late August when the rupee fell to a record low.
The Congress Party, under Prime Minister Manmohan Singh, has staked its re-election bid on an ambitious subsidised food programme that aims to cover two-thirds of households.
S&P estimated on Thursday the bill could double the size of the government's food subsidy in future budgets to about 1.5 percent of gross domestic product.
(Additional reporting by Swati Bhat; Editing by Kim Coghill and Rafael Nam)
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