Rate hike may put brakes on India story: S&P

Global rating agency, Standard & Poor's (S&P), on Friday cautioned that increase in interest rates or any decline in growth rate would make the fiscally-weak Indian economy vulnerable.

India's fiscal weakness is one of the worst among rated sovereigns in the Asia-Pacific region, which makes it particularly vulnerable to any decline in growth rates or an increase in interest rates, S&P said in a research report titled "Credit quality of Asia-Pacific sovereigns proves robust so far in 2006".

Interest rates in India are on the rise since January 2006 with banks having increased their lending rates to both corporates and retailers by as much as 3 per cent.

Also, the government is expected to increase retail prices of petrol and diesel later this month or in early June. It had to issue bonds to state-owned oil marketing companies to make up for the losses suffered by them for not passing on the burden of global oil price hikes to consumers.

"The key event that could mar the largely benign picture is an oil-supply shock. In this scenario, both high oil prices and interest rates would simply reflect severe supply constraints, and economic growth would definitely suffer," S&P said.

The rise of oil prices to current levels has had limited impact on sovereign credit quality in the region. Continued growth of exports to the US has helped Asian economies to maintain healthy growth despite higher energy costs.

S&P said going forward, tightening monetary policy, in response to rising inflation, could rein in growth, though the general appreciation of the region's currencies against those of major trading partners should temper the need for further interest rate hikes.