MUMBAI: Global banking major Standard Chartered said the possibility of a sovereign rating downgrade to the junk status is unlikely given the recent revival in sentiment.
Policymakers will have to show concrete steps to help restore growth and consolidate the fiscal balance in the next few months, it warned, saying no action on the twin fronts can result in adverse action.
"We believe the rating agencies will monitor macroeconomic data points for at least two to three quarters before making a move," says the StanChart report.
The possible factors which can lead to a downgrade include lack of revival in investment demand which can lead to sustained lower growth rates and no progress on reducing the fuel, food and fertiliser subsidies which are leading to wider fiscal deficit, it notes.
It, however, says from the rating point of view, the widening current account deficit and the drop in forex reserves do not pose much of a problem given the country's low gross external debt and robust external liquidity profile.
Conceding that big bang reforms will be difficult, the report gives a quick checklist for the government, suggesting action on hiking diesel/cooking-fuel prices, passage of the insurance and pension bills, completion of coal fuel supply agreements and progress on implementation of the DTC and GST will be the big positives which can revive confidence.
The report further notes that investor perception about the country was boosted last week after Prime Minister Manmohan Singh took over finance portfolio and promised to revive "animal spirits", apart from clarifying the position on taxing foreign investments and retro tax.
"The government has a three to six month window to act as the general election scheduled for 2014 will reduce its ability to undertake bold reform measures," it says.
On the growth front, StanChart estimates the country to clock a 6.2 percent expansion this fiscal, which is among the more gracious ones, though it notes that growth will be below the potential of 7-7.5 percent for an extended period.
It also said a rate cut is unlikely to happen till the end of December, assuming the deficit in the monsoons will keep inflation --RBI's lead indicator--higher.
In the past quarter, global rating agencies S&P and Fitch revised downward their outlook to the country's sovereign rating to negative, following a series of news and events pointing to bleak economic prospects.
The agencies downgraded outlook to negative citing the GDP slipping to a nine-year low of 6.5 percent last fiscal, concerns on the ability to achieve targeted fiscal deficit, crowding out of private investment due to higher government borrowing, high inflation leading to elevated interest rates, falling trade situation which has led to the steepest ever fall of the rupee and a perceived 'policy paralysis' for their action.
The government has set a 5.1 percent fiscal deficit target for this fiscal. Last fiscal it stood at 5.8 percent. But StanChart says fiscal deficit may touch 5.5 percent this fiscal.
A larger worry is the widening current account deficit which had touched a two-decade high of 4.3 percent last fiscal as trade deficit widened massively on the back of rising oil and gold imports.
S&P last month warned that unless there was a concrete action on these fronts, it will be forced to downgrade the country to junk or non-investment grade.