UPDATE 2-S&P says India still faces rating cut risk despite reforms

* Bonds, rupee briefly weaken after report

* S&P says report is regular

* S&P sees FY13 fiscal deficit at 6 pct vs govt target of 5.1 pct

* Reform steps helped revising view on rating-S&P analyst

(Recasts with details, quotes, comments, market reaction)

By Neha Dasgupta and Swati Bhat

MUMBAI, Oct 10 (Reuters) - India still faced a one-in-three chance of a credit rating downgrade over the next 24 months, Standard & Poor's said, although a series of reform steps launched in September had slightly improved the country's prospects.

S&P's credit rating for India is BBB-, one notch above junk grade and the lowest investment rating in the BRICS g rouping of big emerging economies. S&P had lowered India's rating outlook to negative from stable in April.

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

The spate of initiatives unveiled by India including opening up of the retail and aviation sectors to foreign investors and cutting back fuel subsidies is intended in part to stave off a downgrade, which would hurt investor sentiment and push up overseas borrowing costs for Indian companies.

India does not have any sovereign global bond issues.

S&P analyst Kim Eng Tan said the reform measures had helped in "slightly" revising S&P's view on India's rating.

"Right now we do see that government has taken some actions which we didn't expect initially. To some extent that has helped to revise slightly our views of credit downgrade," Tan told CNBC-TV18.

India's outlook can be revised back to stable, S&P said, if New Delhi moves forward with steps to reduce structural fiscal deficits, improve the investment climate, and increase growth prospects.

The report briefly rattled markets, with bond yields edging higher and the rupee falling before recovering to levels before the release. S&P later said the report is the regular Asia-Pacific sovereign report card and does not contain new information on India's rating.

Asia's third-largest economy is growing at its slowest pace in three years, and this week the International Monetary Fund joined the chorus of those slashing their growth forecasts for India, to 4.9 percent in 2012 from 6.1 percent previously.


Last week the government approved bills to attract foreign investment into the insurance and pension sectors in a second set of reforms, although these have to win support from parliament become they become law.

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

However, the fragile minority coalition government of Prime Minister Manmohan Singh faces plenty of opposition in its push to keep reforms moving ahead.

"Primarily, S&P seems to be harping on the fact that there is uncertainty, which is true. The reforms announced so far have helped the investor sentiment more than change much in reality," said Rupa Rege Nitsure, chief economist at Bank of Baroda.

"The problems at the ground level remain and unless those get addressed, the economy cannot get back on the track of sustainable high growth and fiscal consolidation," she said.

Despite the reform moves, S&P expects the government's fiscal deficit to hit 6 percent of GDP for the financial year ending in March, above New Delhi's target of 5.1 percent.

"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.

The high deficit is counteracting the central bank's efforts to control demand-driven price pressures, while the government's use of domestic savings to finance the deficit is crowding out private investment and lowering growth prospects.

A government panel looking into ways to improve government finances said the economy was on the edge of a fiscal precipice and suggested slashing subsidies urgently to curb the deficit which could go as high as 6.1 percent of the GDP.

S&P projects India's current account deficit for the fiscal year to be 3.5 percent of GDP, below last year's 4.5 percent, given foreign investment inflows.

"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.

(Additional reporting by Suvashree Dey Choudhary;Writing by Tony Munroe; Editing by Sanjeev Miglani)


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