The financial market in the country may undergo severe pains in the coming days with the prospects of downgrade by prominent rating agencies. So far, the different rating institutions are waiting to assess the net result of different counter measures and follow ups made by the government and the RBI to overcome the present crisis related to capital outflows and rupee decline.
Once the rating agencies starts downgrading one by one, the net impact is that the corporate fund raising overseas will become costly and foreign institutional investment into the country will worsen. Many foreign institutional investors heavily track on ratings. Altogether, downgrading may further discourage foreign investment into India.
The most important concern for rating agencies is the prospects of deteriorating fiscal health of the government. A bad outcome of rupee depreciation is that petroleum products will become more costly and the government may not pass on the increased cost to consumers in the form of price rise, fearing political risks. In this case, the fiscal situation will worsen- escalating government borrowing and inflation.
Similarly, the depreciation of rupee has increased the debt burden of the corporate. In the coming one and a half years, India’s corporate should repay a large sum they have borrowed from overseas through ECBs (External Commercial Borrowings). Declining profit and slowing down economy along with increasing debt burden because of depreciation may weaken their ability to repay the debt.
In these circumstances, rating agencies may come out with a steep downgrading plan in the coming days; adding misery to the economy.