Moody’s Investors Services has lowered its outlook on India’s sovereign credit rating after a series of steps unveiled by the government to prod the economy out of a demand trough. The rating agency expects the slowdown to endure, as the tax giveaways feed a fiscal deficit higher than budgeted. The government has been quick to point out that the macro-economic fundamentals are not quite so dire, and reforms undertaken to revive exports, manufacturing and real estate over the last three months are expected to restore India’s growth momentum. Low inflation and interest rates are markers against a prolonged credit squeeze that Moody’s expects or the fears of contagion in financial markets flagged by fellow rater S&P Global Ratings.

The initial reaction of stock markets has been tempered by the realization that Moody’s was the only one in a triad of rating agencies to have upgraded India to a notch above the lowest investment rung two years ago. If Friday’s revised outlook were to translate into a rating cut at some point, Moody’s would be reverting to positions held by Fitch and S&P. Over this period, top-rated Indian companies have bumped up their foreign borrowings as the banking system at home froze lending and shadow banks found themselves in a crisis over loosely regulated credit. The government is addressing the current liquidity squeeze, both through monetary easing and by targeted interventions in the most vulnerable sectors. The prospects of an actual rating cut by Moody’s can reasonably be expected to diminish, as the government’s policy tweaks work their way through the financial markets.