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Moody's decision will increase cost of foreign borrowing

The downgrading of India's foreign currency country ceiling by Moody's Investor Services coupled with the trade and credit sanctions imposed by the United States will considerably increase the cost of overseas borrowings by Indian companies and hamper many infrastructure projects in the country.

India's rating for long-term debt and notes has been downgraded to Ba2 from Baa3 and the foreign currency country ceiling for short-term debt has been downgraded to "Not Prime" from "Prime 3", down one notch.

Finance ministry officials fear that the global credit rating agency's decision could also affect the government plans to divest four public sector undertakings -- the Industrial Credit and Investment Corporation of India, the Industrial Development Bank of India, the Oil and Natural Gas Corporation and the Power Finance Corporation.

The bond ratings of these four PSUs along with that of the Reliance Industries, Tata Electric Companies and Tata Engineering and Locomotive Company have been affected by Moody's downgrade.

These firms will find it tough to get foreign currency borrowings as the rating will significantly increase the interest cost.

A government spokesman said on Saturday that the Government of India has no foreign-currency-dominated bonds in its own name. The downgrade will affect only the ratings of those bonds issued by entities domiciled in India.

"The government ruled out the weakening of macro-economic balances due to Moody's downgrade," he said, "The Indian economy has the strength to withstand the impact of the rating."

However, the Reserve Bank of India might now be forced to consider the requests from financial institutions to buy back their own papers or other Indian papers in the international markets, ministry officials said.

Despite the finance ministry's optimism, experts insist that the cost of the private sector borrowing would increase. "The infrastructure sector will be the worst hit since rupee funds are not always sufficient for such projects," said an analyst with the Federation of Indian Chambers of Commerce and Industry.

He said already a number of infrastructure projects were delayed after the World Bank deferred loans worth more than $ 2 billion in the wake of the nuclear tests.

"The cost of borrowing in rupee terms to fund infrastructure projects is much higher than foreign currency loans," the analyst said, adding that the Indian banks now do not have the kind of money needed for such projects.

Analysts like him feel that the downgrading is a warning to the government that it may have to resort to 100 per cent foreign equity participation in the infrastructure sector.

The government has already decided to allow 100 per cent foreign equity participation in power projects. Finance Minister Yashwant Sinha has also allocated Rs 611.46 billion for the energy, transport and communication sectors.

Despite Sinha's confidence that his Budget will spur the infrastructure projects in the country, the twin blows in the last two days will have serious long-term repercussions unless the government takes immediate measures.

Realising this, the government may come out with an economic blueprint to woo foreign direct investment, which, analysts argue, is the best bet against downgrades and sanctions.

Finance ministry sources said the government has also begun a department-wise assessment of the impact of US sanctions on various sectors.

The US sanctions, amounting to $ 2.5 billion, are to affect projects in the ministries of power, surface transport and commerce.