Fitch's downgrade action is herd mentality, says Basu

New Delhi: Chief Economic Advisor Kaushik Basu Monday said Fitch downgrading India's credit rating outlook to negative was "herd mentality" and noted the revision was on expected lines.

"There is herd mentality among policy makers, herd mentality among corporates. There is also little bit of herding among credit rating agencies. We were pretty much expecting Fitch to do so," Basu told reporters here.

"Fitch outlook change to me is not worrying, simply because I was anticipating it. I feel most people were anticipating it," he added.

Global rating agency Fitch's action follows rival Standard and Poor's (S&P) downgrading credit outlook from 'stable' to 'negative' less than three months ago in April. S&P also warned on June 11 that India may be the first in the BRIC grouping to falter and its sovereign credit rating may slip below investment grade.

Basu said, "Even among rating agencies, there is an element of looking over your shoulders, to see what others are doing and given the statement from S&P, it was only to be expected that there would be similar kind of move on part of Fitch."

Despite the downgrade, Basu said that infact in the Fitch statement, there are a lot of positive elements regarding India.

However, Basu said, "There is lot to be done. I think that the next six months will be crucial. There are enough clues to say that there is some deep strength in the country. The country could turnaround."

On Fitch revising the credit outlook, the Finance Ministry in a statement said the recent decline in international oil prices and absence of any major adverse results on corporate performance in last quarter of 2011-12 are all factors that would have a positive impact on the government's fiscal position and more generally on country's economic growth.

Among the positives cited by it include revision of interest rate cycle by RBI in April 2012, decline in core inflation from 8.7 per cent in May 2011 to less than 5 per cent in May 2012, progress on fuel linkage for coal-based power projects and the quarterly investment growth rate becoming positive in the fourth quarter of 2011-12.

Basu said though he was not concerned about the Fitch statement, "we certainly should not be in denial mode."

"We should not dismiss that. After all these are very important agencies. It would be foolish, not to take them seriously. This acts as a wake up call," he added.

On RBI maintaining status quo on its monetary policy stance, Basu said, "It is.. Healthy interchange of difference of opinion. There is no hammer which comes from the top which says that every unit of government...RBI...Has to speak in one voice."

Contrary to market expectations, the Reserve Bank today kept policy rates unchanged in view of rising inflation and global economic uncertainty.

However, Basu said, "the instrument of interest rate is not quite powerful to control inflation today than it would have been at another time."