Standard & Poor's on Wednesday downgraded India's credit outlook to negative as a weakening economy and gaping fiscal deficit put the country's prized investment-grade rating at risk.
The agency maintained India's rating at BBB-, but warned it faces at least a one-in-three chance of losing its status if its financial situation worsens.
The "BBB-" is one notch above "junk," which carries an increased risk of default and would see India having to pay higher interest rates on its public borrowing.
"India's investment and economic growth have slowed and its current-account deficit has widened, resulting in a weaker medium-term credit outlook," S&P credit analyst Takahira Ogawa said in a media conference call.
"We are revising the outlook on the long-term ratings on India to negative."
Asia's third-largest economy is battling stubborn inflation, the widest budget deficit of all major emerging economies, a weak fiscal position and slower growth on the domestic front.
Uncertainty in global markets and Europe's long-running sovereign debt crisis have added to the pressures.
India's benchmark Sensex share index fell 150 points after the S&P announcement before retracing some of its losses to trade down nearly a percentage point, or 133.21 points, at 17,090.98.
Finance Minister Pranab Mukherjee, seeking to reassure investors, said the government was "confident of overcoming difficulties", telling reporters "there is no need for panic".
India's economic reform process has been paralysed by a string of political scandals that has beset Prime Minister Manmohan Singh's Congress-led government.
S&P in 2007 hiked India's credit rating to investment-grade, a move that paved the way for global funds to invest in government bonds and other debt in the country.
But now, Ogawa said, "there's at least a one-in-three chance we may move the rating down in the next 24 months if the external position deteriorates, growth prospects diminish or progress on fiscal reforms remains slow."
India's fiscal deficit was 5.9 percent of gross domestic product in the fiscal year ended on March 31, swelled by social spending programmes targeting the country's hundreds of millions of poor.
The government hopes to trim the deficit to 5.1 percent of GDP this year, but analysts are sceptical given the government's record borrowing plans.
India's economy is forecast to expand around 7.6 percent this fiscal year, from the 6.9 percent estimated for last year, the second slowest pace in a decade.
S&P's negative outlook came as Moody's Analytics, part of credit analysis giant Moody's Corp, said India's economy was growing well below potential.
"The government has lost all momentum" on economic reforms, Glenn Levine, senior economist at Moody's Analytics, said in an investor note.
[Indian woman at her laptop via Shutterstock.com>]