Once upbeat on India, Moody’s turns a pessimist2 min read . Updated: 02 Jun 2020, 11:02 PM IST
Moody’s Investors Service on Tuesday cut India’s sovereign rating by a notch to the lowest investment grade with a negative outlook. Mint explains the reasons behind the downgrade and what it means for various stakeholders
Why did Moody’s downgrade India?
In November 2017, Moody’s upgraded India’s sovereign rating hoping that the structural reforms that were being undertaken by the government will lift up the country’s potential growth. A lot of analysts then viewed it with suspicion, calling it over-optimism on the part of the rating agency. Neither of the other two rating agencies, S&P and Fitch Ratings, followed suit. Now, about two-and-a-half years later, Moody’s seems to be doing a course correction, admitting that the implementation of reforms has been relatively weak and hasn’t resulted in material credit improvements, indicating limited policy effectiveness.
What was the backdrop to the downgrade?
India’s growth momentum has been slowing down and the fiscal metrics weakening even prior to covid-19 hitting the economy. The country’s GDP growth slowed down to an 11-year low at 4.2% in FY20, while fiscal deficit worsened to 4.6%, way above government’s estimate, according to the latest data. The unfolding pandemic has aggravated India’s existing structural weaknesses. India’s debt-to-GDP ratio, a metric all rating agencies take note of, is set to rise to 84% in FY21 from 72% in FY20 at a time GDP is projected to contract by 4%. Moody’s does not see it substantially improving medium term.
Will other rating agencies follow suit?
Moody’s rating upgrade for the country in the year 2017 did not lead to a similar change in stance by other credit rating agencies. Also, Moody’s was one notch above other rating agencies prior to the downgrade. So, a rating downgrade that would mean junk status of country’s government bonds by S&P and Fitch Ratings is unlikely.
What is the govt’s view on the downgrade?
The finance ministry is reticent this time though its views are otherwise well-known. Expenditure secretary TV Somanathan last month said there are “double standards" in the rating game. The secretary has held that India’s debt-to-GDP ratio is way below many of the developed countries’. “We live in a real world and we are aware of these double standards," he said. Arvind Subramanian, when he was the chief economic adviser in the finance ministry, alleged rating firms favoured China over India.
How will it impact the financial markets?
The Indian equity market seems to have already priced in a downgrade by Moody’s as the Sensex picked up by 522 points to close at 33,825.53 on Tuesday. However, the rupee came under pressure, breaching the 75 threshold against the dollar. Analysts expect bond yields to firm up if the RBI does not step in to absorb a large chunk of the government securities. The ratings downgrade could also undermine the efforts of the government to attract foreign capital into its debt market to fund the country’s ballooning fiscal gap.