The banking system is only a mirror and barometer of the functioning of the larger economy, which includes the way in which it is being managed. There can be no two views today that growth in the economy has weakened, even while inflation remains stubbornly high. What is equally indisputable is that the second tenure of the ruling United Progressive Alliance has been marked by policy paralysis, and so-called governance deficit that has, in turn, dented investor confidence. If the ‘real' economy isn't doing all that great, is it not bound to reflect in the financial system as well? After all, what does the increasing trend of delinquent loans to the power sector represent – other than the fact that stalled tariff and distribution reforms have bankrupted state electricity boards, just as the indecision on coal linkages and land acquisition have held up projects?

One way to look at the actions of rating agencies is to laugh at them. There is some justification for that: It, indeed, beats reason how Italy and Spain — or, till four months back, even Portugal — enjoy better ranking on these agencies' scale than India. But then, like it or not, the markets place great store on their opinion about the creditworthiness of a particularly country or company. And these opinions sometimes serve to bring the necessary ‘market' pressure on recalcitrant governments. Take the example of SBI itself, where Moody's downgrade was based on the hazy picture with regard to capital infusion in the country's largest bank to enable it to meet regulatory requirements. This single rating action would probably be more effective in forcing a vacillating Government into doing something about it, than SBI's own Oliver Twist-like pleas and supplications
source:businessline