India's central bank, the Reserve Bank of India (RBI) has said that a cut in credit rating of the sovereign could increase the cost of borrowing money from international markets for the Indian banks.
The remarks come following downgrades announced by Fitch and Standard & Poor's. Analysts at Fitch have downgraded some of India's largest banks following a downgrade of India's outlook. The company pointed out that the downgrade of banks does not necessarily shows weakness in banks themselves but it is due to the relationship between the government and the banking sector. State Bank of India and ICICI Bank were among the banks that were downgraded by the company.
On the other hand, Standard & Poor's has said that it might have to reduce the rating for India making it the first BRIC nation to lose the investment rating. The country economy is struggling to cope with High inflation and interest rates, splits in the top leadership and the euro zone debt crisis since more than a year.
"A change in the current external rating of the country could have 'cliff effects', impacting both, the availability and the cost of foreign currency borrowing for Indian banks and firms," the RBI said in a report on financial stability.
RBI pointed out that a majority of foreign currency borrowings by Indian companies are in the form of loans and not debt.