The change in the outlook reflects the erosion of India's external financial position following imposition of sanctions by the US and other countries in response to nuclear tests carried out by India last week, S&P said.

The downgrading of India's foreign currency rating outlook to negative by S&P may see a further slide in the rupee vis-a-vis dollar and selling pressure by FIIs accentuated. Though post-sanctions the financial markets including the foreign exchange and stock markets have weathered the storm, analysts and brokers see the pressure on the rupee remaining and the pre-budget rally in stocks not materialising.

"While the country's ample foreign currency reserves - about 25 billion dollar, or twice its stock of estimated short-term debt - shouldallow it to absorb the near-term impact of sanctions, India's balance of payments could come under increased strain in the medium term from reduced inflow of both official and private capital," the rating agency said.

S&P said reduced access to concessional loans, which now comprise nearly 43 per cent of the country's external debt, will increase the country's dependence on higher cost private funding. Sanctions and heightened regional tensions could also reduce the flow of foreign direct and equity investment, "which have typically exceeded India's modest current account deficit in recent years and facilitated a reduction in its external debt burden to about 165 per cent of exports from 243 per cent in 1994," S&P said.

Combined with poor export performance - exports grew only 3 per cent last year - the recent decline in the country's external debt burden is likely to be halted, if not reversed, S&P said.

With regard to the negative outlook, S&P said "a ratings downgrade could occur if economicsanctions materially worsen the country's access to external funding, lower its growth prospects, and exacerbate its already high fiscal deficit."

It may be mentioned that soon after the first nuclear test Leo C O' Neil, chief rating officer, S&P had told The Indian Express that the fundamentals of the economy are strong enough to be able to withstand any pressure arising out of economic sanctions. The sanctions will not have any long term impact. "At this point these tests do not call for any downward revision in India rating," he had said after the first nuke test.

The agency while rating the ECB programme of the Power Finance Corporation had confirmed the outlook on India' long-term foreign currency ratings of `BB+' and local currency rating of `BBB+' as stable.

However, IDBI chairman SH Khan was confident that there would not be a major impact on the financial markets. "It is not at all an important development for India. Domestic corporates do not need any foreign currency resources due to theexchange rate fluctuation. IDBI has enough resources to fund Indian corporates for the next six months. Anyway sanctions are a subtle form of measure, so also S&P's latest announcement." Khan adds that the US institutions will be at a loss.

AR Barwe, managing director of SBI Caps, concurs with Khan's views. He does not see any major fallout immediately.