Standard & Poor, (S&P) has downgraded India's rating to BBB (negative) from BBB (stable). This could have an adverse impact on income funds in the short term.

According to reports appearing in leading business dailies, S&P cited the financial scams as one of the factors that influenced the downgrading apart from the widening fiscal deficit, sharp increase in government debt and failure to privatise government companies.

OPEN-ENDED, INCOME FUNDS	NAV(Rs)	1-WEEK	1-MONTH	6-MONTHS	12-MONTHS	INCEPTION
PNB DEBT FUND (G)	13.9	0.3%	0.7%	10.0%	20.2%	16.6%
KP INC BUILD G	17.2	0.3%	1.2%	9.6%	18.4%	14.0%
IDBI PRI DEP BOND G	11.8	0.3%	1.3%	9.1%	18.2%	18.0%
K BOND WHOLESALE G	12.7	0.3%	1.0%	9.0%	17.4%	14.6%
DSP ML BOND G	17.1	0.3%	1.1%	8.7%	17.1%	13.2%
ZURICH HIGH INT G	17.1	0.4%	1.2%	8.7%	16.6%	13.1%
K BOND-DEP G	12.5	0.2%	0.9%	8.7%	16.6%	13.7%
KP CHILD ASSET	14.9	0.2%	1.0%	7.2%	16.3%	14.6%
PRU ICICI INC G	14.7	0.3%	1.1%	8.2%	16.3%	13.3%
TEMPLETON INC G	17.8	0.2%	0.9%	8.0%	16.2%	13.9%

(Returns over 12 months are annualised)

The move could have a depressing effect on bond prices in the short term. This looks more likely when one considers that bonds are witnessing a bull run so to speak. However, newspaper reports carried comments from State Bank of India (SBI), Bank of India (BoI) and ICICI to the effect that the impact from the downgrade will be marginal as the country's financial health was by and large sound and there is no concern big enough to merit a downgrade.

However, there is a perception and then there is the reality and there is no way to be sure what will dominate over the coming days. In the short term, there could be a decline in bond prices as sentiment normally takes over in moments like this one. If bond prices do fall, then debt and gilt fund net asset values (NAVs) could witness a decline. But income funds are for long-term investors in which case the rough must be taken with the smooth.

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