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Mumbai: India's credit outlook was cut to "negative" by Fitch Ratings on concern rising subsidies, interest payments and wages will weaken government finances.
Bonds, the rupee and stocks fell after Fitch reduced its outlook from "stable" on India's local-currency debt rating of BBB-, the lowest investment grade and six levels below China and Japan. Standard & Poor's (S&P) last week said it may cut India's credit rating to junk if the economy deteriorates further.
"The revision to the local currency outlook is based on a considerable deterioration in the central government's fiscal position, combined with a notable increase in government debt issuance to finance subsidies not captured in the budget," James McCormack, Fitch's head of Asia sovereign ratings, said.
High spending
Prime Minister Manmohan Singh is spending more on government salaries, has increased food, fuel and fertiliser subsidies and waived farmers from repaying $17 billion of debt to mitigate the effects of runaway inflation. A rating downgrade may reduce investment coming into the country and make it more expensive for Indian companies to borrow.
India's 10-year bonds declined, pushing yields to near the highest since 2001, after Fitch cut its outlook. The yield on the benchmark 8.24 per cent note climbed nine basis points to 9.47 per cent in Mumbai. The benchmark stock index fell four per cent and the rupee dropped as much as 0.7 per cent to 42.23 per dollar.
Foreign investors, who bought a record $17.2 billion of Indian stocks last year, are now fleeing the economy amid the fastest inflation in 13 years and the weakest growth since 2004. Overseas investors have pulled out $6.73 billion since January, contributing to the 37 per cent fall in the index this year.
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