Alternatively, the credit ratings agency said it may revise India's outlook back to "stable" should a new government have an agenda to restore growth, improve the country's finances, or allow the implementation of an effective monetary policy. (Agencies)
S&P is the only of the three major credit agencies with a "negative" outlook on India. The country is rated "BBB-minus" or its equivalent by these agencies, or the lowest investment-grade rating, meaning it would fall into so-called "junk" territory with any downgrade.
S&P added it will conduct its next review on India's ratings after the elections, which are due by May 2014, unless the country's fiscal or external standing deteriorates.
"The negative outlook indicates that we may lower the rating to speculative grade next year if the government that takes office after the general election does not appear capable of reversing India's low economic growth," S&P said in a statement.
"If we believe that the agenda can restore some of India's lost growth potential, consolidate its fiscal accounts, and permit the conduct of an effective monetary policy, we may revise the outlook to stable. If, however, we see continued policy drift, we may lower the rating within a year."
The credit agency affirmed India at "BBB-minus" on Thursday, citing its low external debt, ample forex reserves and an increasingly credible monetary policy. S&P had cut its outlook on India to "negative" in April last year.
Still, India's economy has been a key drag on its ratings after growth slowed to a decade low of 5 percent in the fiscal year ended in March. Analysts have widely attributed the middling growth to the government's lack of decisive policy action and high interest rates.
The current account and fiscal deficits are also seen as leaving the country vulnerable to foreign investor sell-offs, most recently in late August when the rupee fell to a record low.
The Sensex nearly gave up all gains to trade 0.2 percent up on the day from 1.1 percent after the S&P report. The partially convertible rupee fell to 62.73 per dollar, its weakest since September 30.
"While the overhang of a potential S&P downgrade is not new, it can introduce higher volatility," said Varun Khandelwal, managing partner and director at Bullero Advisors.
"December to April will be critical and most likely markets will shrug off today's statement," he added.
Alternatively, the credit ratings agency said it may revise India's outlook back to "stable" should a new government have an agenda to restore growth, improve the country's finances, or allow the implementation of an effective monetary policy.