The rupee weakened and shares tumbled after Standard & Poor's warned that a slowdown in economic growth and the political paralysis on economic development gripping the country carried the risk of re-rating.
Currently India's BBB- rating is just one level above junk status and the lowest in the Bric 'club' which has Brazil, Russia and China as its other members.
Joydeep Mukherji, a New York-based S&P analyst, said: "Setbacks or reversals in India's path toward a more liberal economy could hurt its long-term growth prospects and therefore its credit quality."
Growth in the booming Indian economy has slowed with the loss of export business in depressed European markets while business leaders are deadlocked with the Government over economic development plans and policy changes. Corruption scandals have not helped India's image while some foreign investors say they now get a cooler reception.
India has a record trade deficit, the biggest among the Bric nations, and an inflation rate of more than 7pc but prime minister Manmohan Singh has promised to stimulate the economy with port, road and power plant projects.
Separately, Chen Deming, commerce minister, said China faced a "severe" trade situation this year but "with luck" could still achieve a 10pc growth in trade, well down on the 22.5pc achieved last year.
Economic growth has slowed to just over 8pc and resulted in a series of stimulus measures including a cut in interest rates and an increase in bank lending.
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