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Moody's lowers India's rating

Our Bureau

MUMBAI, Aug. 9

THE international rating agency, Moody's Investors Service, has lowered India's sovereign rating outlooks by a grade.

A day after its counterpart, Standard and Poor's, downgraded the rating outlook on the sovereign, Moody's has followed suit by revising the foreign currency country ceiling to stable from positive. Domestic currency debt rating has been lowered to negati ve from positive.

Moody's said the changes reflect its concern that the long-anticipated deepening of macro-economic reforms has not materialised. Future implementation of the needed adjustments will be imperilled by the domestic and global economic slowdown and the fract ured cohesion of the coalition Government.

The agency said current and capital account inflows on the balance of payments will be insufficient to prevent a further rise in the country's external debt liabilities. Even though the forex reserves and quite low short-term Government debt indicate a f avourable liquidity position, there is no guarantee that the external finances are healthy.

Citing the Dabhol imbroglio, Moody's said lapses in contractual enforcement allowed by bureaucratic discretion, complex regulatory regime and infrastructure shortages have dampened foreign investor confidence.

In the absence of significant foreign investment, non-resident Indian inflows and commercial debt-creating capital are now the major source of balance of payments support, which cannot be relied upon to provide financing on an on-going basis in all marke t conditions.

The agency said a positive stance on the country's foreign currency ceiling is no longer appropriate as the diminished prospects for structural improvements in the Indian economy pose risks for the health of external finances.

About the domestic debt, it said chronic failures to meet deficit targets, disappointing delays in privatisation of public sector undertakings, and growing contingent liabilities on off-Budget appropriations have raised concerns that fundamental adjustme nts will only come in an atmosphere of crisis. The recent episodes of UTI and IFCI highlight the need to improve corporate governance at State-controlled institutions, and the urgency is not limited to lowering the fiscal costs of recurrent public sector bail-outs.

In spite of their oft-declared appreciation of the difficult economic situation, policy-makers appear to have missed an opportunity to execute the most important elements of the ``second generation'' reforms in the early years of the current administrati on, it said.

It said the additional downward pressure on the Government's domestic currency rating arises from the absence of a coherent and realistic strategy to curtail the Budget deficit and thereby reduce the public debt and debt service burden.

IDBI, PFC, Tata Electric: Meanwhile, Moody's said it has downgraded the rating outlooks on foreign currency debt of IDBI, Power Finance Corporation and Tata Electric Companies, and the foreign currency deposits of several banks to stable from positive.

The revision follows the lowering of the foreign currency rating outlook of the sovereign by a grade. The rating action would not affect the rating of ICICI which is on review for possible upgrade, in line with the Moody's revised policy on foreign curre ncy country ceilings, it said.

The rating of IFCI is also on review for possible downgrade. The banks, whose rating outlooks have been downgraded are State Bank of India, Bank of Baroda, Bank of India, Oriental Bank of Commerce, Canara Bank, Central Bank of India, Union Bank of India and Punjab National Bank, Moody's said.