The Indian rupee has once again started to weaken against the US dollar after Standard & Poor’s Ratings Services yesterday warned the major economy could become the first BRIC nation to see a downgrade to junk status.
India is currently rated BBB- by S&P, one level above ‘speculative’ or junk grade, and the lowest among the BRIC nations, which also comprise Brazil, Russia and China. “Slowing GDP growth and political roadblocks to economic policymaking are just some of the factors pushing up the risk that India could lose its investment-grade rating,” S&P said in a statement.
Following yesterday’s comments, the Indian rupee declined from its Friday’s closing price of Rs15 against a UAE dirham to Rs15.19 vs. Dh1 yesterday.
The rupee has slumped further this morning, and was trading at Rs15.26 against Dh1 (Rs56 against $1) at 10.30am UAE time (6.30am GMT).
The ratings firm S&P had, in April, lowered the outlook on India’s BBB- rating to negative from stable, and had then said that there was a one-in-three chance of a downgrade over the following 24 months.
A recently released report by S&P, titled ‘Will India Be The First BRIC Fallen Angel?’ states that the Indian government’s reaction to potentially slower growth and greater vulnerability to economic shocks could largely determine whether the country can maintain an investment-grade rating or become the first ‘fallen angel’ among the BRIC nations.
“Setbacks or reversals in India’s path toward a more liberal economy could hurt its long-term growth prospects and, therefore, its credit quality,” said S&P credit analyst Joydeep Mukerji.
“The combination of a weakening political context for further reform, along with economic deceleration, raises the risk that the government may take modest steps backward away from economic liberalisation in the event of unexpected economic shocks. Such potential backward steps could reverse India’s liberalisation of the external sector and the financial sector,” said Mukherji.
The rupee was among the worst performing major currencies in 2011, and the downtrend has continued into 2012 with the currency making ten fresh lifetime lows this year so far.
The currency of the South Asian economy has declined by more than 27 per cent in the 10 months since August 2011, with analysts maintaining a further downside in the wake of a policy stalemate that is unlikely to resolve before the 2014 general elections.