India in denial over S&P downgrade of financial system

India seems hesitant to accept the reality of a negative rating from Standard & Poor's.

S&P recently cut India's outlook to negative from stable, citing slow progress on its fiscal situation and deteriorating economic indicators. The lowered outlook jeopardises India's long-term rating of BBB-, which is the lowest investment grade rating.

It also indicated there is a one in three chance of a downgrade to India's credit rating if external conditions continue to deteriorate.

The Reserve Bank of India, the central bank, however, reacted to the downgrade by stating that India’s banking and financial system is strong and sometimes these ratings are discounted by markets.

It also said that it will intervene in the forex market only if there is high volatility in the currency market, and not because of the ratings.

RBI Deputy Governor K C Chakrabarty said the central bank next financial stability report in June will highlight India’s financial strength and will reflect the position of the economy.

"Indian financial system is strong,” he said. “That is what our internal assessment. That our financial stability report always gives. Again, RBIs financial stability report will come in June. Then you can see what the position is.”

"Sometimes … what is coming in the rating is discounted by market," he added

On the other hand, Finance Minister Pranab Mukherjee said the government was not feeling panicky but it was concerned and will take note of the timely warning from S&P. He said he can’t comment further on the subject as RBI is examining the situation.