India's Credit At Risk -- Rupee Looks To Rally

Fitch Ratings today reaffirmed its negative outlook on India’s sovereign credit rating, citing concerns about slowing economic growth, persistent inflationary pressures and an uncertain fiscal outlook. Fitch sovereign analyst Art Woo’s comments confirm the worries about India losing its Investment grade status or rating from the credit agency. Although Woo described India’s fiscal and economic reforms last year as a step in the right direction, he also expressed concern that the Indian government would miss its Fiscal Deficit target for the year, while saying the structural reform process was “sluggish.” The negative outlook reflects Fitch’s concerns over deterioration in India’s economic and fiscal outlooks, particularly a sharp slowdown in growth, persistent inflationary pressures and weaker public finances, Woo said in a conference call. The Fitch analyst also expressed concern about India’s record current account deficit of 5.4% in the September quarter. The Indian economy extended its long slump in the September quarter, growing only 5.3% from a year earlier, below the 5.5% expansion seen in the three months to June, keeping it on track for its worst year in a decade. Fitch and Standard and Poor’s last year cut their ratings outlooks for India to “negative”, putting India in danger of being the first of the BRICS grouping of fast-growing economies to be downgraded to “junk” status. Fitch and S&P also affirmed the country at BBB-, the lowest investment grade rating. Moody’s has a “stable” outlook on its comparable Baa3 rating for India.

India Government Not Worried About Downgrade
The Finance Ministry today said it is not worried about the threat of ratings downgrade by global agencies like Fitch as it is moving on the right track and will restrict fiscal deficit to 5.3% of the GDP in 2012-13. We are not worried. We have been saying we are on right track. But people still distrust us and ask whether we will able to achieve fiscal deficit target… We will adhere to fiscal consolidation road-map, Department of Economic Affairs (DEA) Secretary Arvind Mayaram told PTI, when asked about the threat of rating agencies like Fitch to downgrade the country’s rating. Fitch, during a recent conference call in Tokyo, had reiterated its threat to downgrade India’s rating against the backdrop of slowing growth, high inflation and rising fiscal deficit. It had earlier said that the possibility of downgrading the country’s sovereign rating was more than 50% in the next 12-24 months. Standard & Poor’s had last month said that India faces one-in-three chance of rating downgrade in the next two years in case the government fails to push reforms in view of the political gridlock and ensuing general election in 2014. The Government of India has since unveiled measures such as raising fuel prices and further opening up the retail sectors for foreign investment. Given that next general elections in India must be held before May 2014, it will be the last full-fledged budget of the Congress-led UPA government at the Center and hence could be a populist one.

India Can Expect 10% Rally In Rupee On Inflows
India’s INR -- Rupee will rise at least 10% in 2013, its biggest gain in six years, as central bank interest-rate cuts spur growth in Asia’s third-largest economy, according to a Bloomberg report.

The RBI -- Reserve Bank of India, which last reduced its benchmark rate in April, will lower it by 25 basis points to 7.75% at its Jan. 29 review, according to eight of 10 analysts in a Bloomberg News survey. Foreign funds have raised investments in Indian Rupee-denominated debt by $7.1 billion since the end of 2011, latest regulator data show. The holdings touched a record $33.3 billion on Jan. 3.

India Stock Markets On Last Rally Lap
The 50-share NSE Nifty closed above 6000 level for the first time in last three sessions on some short covering, rising 13.30 points to 6,001.70. The 30-share BSE Sensex was up 51.10 to 19,742.52. The Stock Market has been consolidating since it touched the psychological 6000 mark last week on U.S. Fiscal Cliff deal and diesel price hike hopes. Nifty remains positive till above 5959 and is poised to rise close to 6085 -- 6103 range. There can be pressure build-up above these levels as there are no major growth triggers seen as of now. Equity Markets around the world are likely to be highly volatile due to the U.S. Debt Ceiling negotiations in February and investors should become a bit more cautious. I would ride the Nifty wave close to 6100 and exit and new position creation or investment is definitely out of the question with India announcing the 2013 Budget and also the U.S. Debt Ceiling negotiations in February. Stock Markets in India & also globally can expect a short term rally -- The last Rally Lap before a meltdown expected to occur during and after the U.S. Debt Ceiling negotiations.