UPDATE 1-S&P says India still faces rating cut risk despite reforms

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MUMBAI, Oct 10 (Reuters) - Ratings agency Standard & Poor'swarned that India still faced a one-in-three chance of a creditrating downgrade within the next 24 months despite a new drivefor economic reform that was launched in September.

"A downgrade is likely if the country's economic growthprospects dim, its external position deteriorates, its politicalclimate worsens, or fiscal reforms slow," it said in a reportdated Tuesday and released on Wednesday.

India's benchmark 10-year bond yield edgedup 2 basis points to 8.17 percent after the S&P comments whilethe rupee extended losses to trade at 53.14 per dollarfrom 52.90, and stocks also fell further.

India has a rating of BBB-, one notch above junk grade andthe lowest investment rating in the so-called BRIC economies.

S&P had downgraded India's rating outlook to negative fromstable in April.

India's outlook can be revised back to stable, the ratingsagency said, if the government goes ahead with steps to reducestructural fiscal deficits, improve the investment climate, andincrease growth prospects.

"After a long wait, the government seems to have reignitedreform efforts," it said.

India's government last month announced long-awaited reformsas part of a package of measures aimed at reducing its deficit,reviving growth and staving off a ratings cut.

It opened up India's supermarket sector to foreign chainsand allowed more overseas investment in airlines andbroadcasters in addition to increasing subsidised diesel prices.

Notwithstanding these measures, the ratings agency expectsthe government's fiscal deficit to be higher than thegovernment's budgeted estimate, at 6 percent of GDP for thefinancial year ending in March.

"Weaker-than-expected tax receipts, owing to weaker economicgrowth, and higher-than-budgeted subsidies are the main reasonsbehind it," S&P said, referring to its deficit outlook.

In March, the government had estimated the fiscal deficit at5.1 percent of GDP for the ongoing financial year.

S&P projects the current account deficit for the financialyear to be 3.5 percent of GDP, below last year's 4.5 percent,given the inflow of foreign direct investment, and portfolioinvestments.

"However, if the current account deficit shows littleimprovements going forward, the country's external positioncould cease to be a supporting factor for the sovereignratings," S&P said.

India's current account deficit shrank by 24 percent in theApril-June period from an all time high in the previous quarter,narrowly returning the balance of payments to surplus after anearlier worrying slide towards dangerous territory.

(Reporting by Mumbai newsroom)


Messaging: neha.dasgupta.reuters.com@reuters.net))