India Inc's funding costs to soar after Standard and Poor's negative outlook - The Times of India MUMBAI: Indian corporates could see their overseas borrowing costs shoot up should Standard & Poor's negative outlook result in an actual downgrade. A downgrade would hit overall funding and would inevitably end up being a self-fulfilling prophecy by hurting the economy rather than merely providing an opinion on its creditworthiness . "A downgrade would have huge implications for the economy. India is at the lowest rung of the investment grade and a downgrade would result in the country falling to the junk category. This will result in certain allocation for India going away and a rise in the funding costs of corporates. This will also have implications for funding of the country's growing balance sheet/ funding requirements," said Ashish Vaidya, head fixed income currency and commodities at UBS India. Besides revising its outlook on the sovereign, S&P has also put on its negative list three IT companies-Infosys , TCS and Wipro. Similarly three public sector entities NTPC, NHPC and Steel Authority of India have had their outlook revised to negative . Bankers say that international investors mandated to put their money in only investment grade paper will be wary of investing in bonds issued by PSUs because of the downgrade possibility. For corporates a significant portion of funding comes from the external route. The global plans of Indian companies also depend on the availability of international finance. All the bigticket acquisitions by large business houses have been on the back of financing from multinational banks. "We expect spreads to be under pressure in the near term with an overhang of a potential downgrade should there be no improvement in the macroeconomic conditions or growth prospects, but issuances from strong Indian companies and institutions will continue to see investor interest ," said Sunil Agarwal, head, institutional clients group, Deutsche Bank, India. According to Gautam, Triveri, MD & head-equities , Religare Capital Markets, the outlook revision is incrementally negative for the rupee and capital flows (portfolio and direct ). "We believe the rating remaining at investment grade contains the damage. Had a rating downgrade (to non-investment grade-Junk ) happened , it would be far more negative, since it would escalate funding costs for Indian firms abroad, and preclude some FIIs to access local debt and equity markets." But several bankers see the downgrade as a clear and present danger. "I think that there are chances of a downgrade if there is no improvement in the current account or there is no reform and fiscal consolidation ," said Vaidya. S&P has indicated that it will wait a few months to see if there is any improvement in the fiscal position or the direction of reforms . However, the rating agency has made it clear that it could take a downgrade decision at any time if there is deterioration in any of the macroeconomic parameters. According to Deutsche Bank, a key risk to India's ratings outlook in the coming year or two is that the fiscal adjustment envisaged in the budget is not accomplished due to unfavorable macro developments like a further slowdown in growth and policy slippages such as a rise in subsidies. "More crucially, if the slippage also reflects no medium term movement toward expanding the tax base and expenditure restraint, the ratings outlook would invariably worsen," the bank said in a research report. Corporates and banks will also find it tough to raise funds through international bond issues. A large number of funds that invest in these securities are mandated to put money only in investment grade paper while there are risk taking investors who buy "junk" bonds they demand a high rate of interest. "The negative outlooks on the 11 financial institutions reflect the outlook on the sovereign credit rating on India. We could lower the ratings on these financial institutions if we lower the sovereign rating or the stand-alone credit profiles of these financial institutions deteriorate sharply or we believe that such deterioration is unlikely in most cases. We could revise the outlook to stable if we take a similar action on the sovereign rating," S&P said in a statement.