S&P: rising risks to Indian investment grade rating

MUMBAI (Reuters) - India risks losing its investment-grade credit rating if it is unable to contain rising inflation and widening fiscal and current account deficits, Standard & Poor's Ratings Services said on Friday.

"We are seeing increasing risks to India's "BBB-"rating from rising fiscal deficits, rising inflation, and to a lesser extent, widening current account deficits," Takahira Ogawa, primary credit analyst at Standard and Poor's, wrote in a report.

"Failure to respond adequately to negative developments as they arise in this pre-election period could point to a sustained deterioration in macroeconomic stability and thus increase the probability that the government's ratings could be lowered to speculative grade," it said.

S&P raised India's rating to "BBB-/Stable/A-3" in January 2007, the lowest rung of investment grade. Sovereign ratings tend to be a cap on corporate ratings, and as such affect the interest rates at which companies can raise funds overseas.

S&P expects India's fiscal deficit to reach 9 percent of GDP in 2008/09 (April/March), up from an earlier estimate of 6.5 percent, due to a rural debt waiver scheme and the costs of subsidies for retail fuel and fertiliser costs.

Annual inflation accelerated to 11.89 percent in late June, its highest in more than 13 years.

The ratings agency said rising prices would force investors to demand higher premiums in the debt markets and since the government was the biggest borrower in the bond markets, that would affect the fiscal deficit.

The current account deficit may widen to $35 billion in calendar 2008 from $25 billion last year, S&P said.