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's warned that India still faced a one-in-three chance of a credit rating downgrade within the next 24 months despite a new drive for economic reform that was launched in September.

"A downgrade is likely if the country's economic growth prospects dim, its external position deteriorates, its political climate worsens, or fiscal reforms slow," it said in a report dated Tuesday and released on Wednesday.

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

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

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

India's outlook can be revised back to stable, the ratings agency said, if the government goes ahead with steps to reduce structural fiscal deficits, improve the investment climate, and increase growth prospects.

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

India's government last month announced long-awaited reforms as 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 chains and allowed more overseas investment in airlines and broadcasters in addition to increasing subsidised diesel prices.

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

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

In March, the government had estimated the fiscal deficit at 5.1 percent of GDP for the ongoing financial year.

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

"However, if the current account deficit shows little improvements going forward, the country's external position could cease to be a supporting factor for the sovereign ratings," S&P said.

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

(Reporting by Mumbai newsroom)


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