Experts see S&P downgrade put strain on Indian rupee

Mumbai: Following India’s downgrade by Standard & Poor’s from stable to negative, experts are of the view that the ratings agency outlook is likely to put a strain on the rupee.

“With the outlook negative, this is likely to put a strain on the currency and is on track to meet our Q2 target of 54.00 (to the dollar).The OIS curve is tighter as rates inch higher particularly in the front end. This is made worse as liquidity is tight, with repo borrowings rising to 1.18 trillion rupees above the comfort zone of RBI,“Suresh Kumar Ramanathan, Regional rates and foreign exchange strategist at CIMB investment bank in Kuala Lumpur told_Reuters_.

The ratings agency earlier today cut India’s outlook to negative from stable, citing its large fiscal deficit and expectations of only modest progress on reforms given political constraints. It said it expects India’s current account deficit to widen to 3.7 percent in the financial year 2011/12 that ended in March, compared with 2.6 percent the year ago.

There is a one in three chance of a downgrade to India’s credit rating if external conditions continue to deteriorate, the ratings agency said in a statement.

Ramanathan agreed. “The curve is likely to steepen and we see the front end continuing to see much of the action as market prices in the risk premium of ratings outlook into negative via paying on the rates,” he said.

Reuters