Moody’s cuts India’s rating by one notch

Agency puts country in Baa3 grade, maintains negative outlook

Moody’s Investors Service on Monday cut long-term sovereign rating for India from ‘Baa2’ to ‘Baa3’ — a notch above junk. The global rating agency maintained its negative outlook, citing structural weaknesses, weak policy effectiveness, and slow reforms momentum even before the Covid-19 pandemic.

The change brings Moody’s rating into line with Fitch and Standard and Poor’s, both of which rate India BBB-, although they assign stable rather than negative outlooks. Due to Covid-19 related stress on economies, ratings for Great Britain, South Africa, and Italy, among others, have also been downgraded, and for others like Indonesia, France, and Brazil, the outlook has been lowered.

Moody's feels India is heading for a sustained period of low growth, which its policymakers won’t be able to mitigate. “While the action was taken in the context of Covid-19, it was not driven by its impact. Rather, the pandemic amplifies vulnerabilities in India's credit profile that were building prior to the shock, and which motivated the assignment of a negative outlook last year,” it said. Moody’s had raised India's rating by a notch to ‘Baa2’ in November 2017. In November 2019, Moody’s cut its outlook on India to negative from stable. A month later, Standard & Poor’s had warned that if an economic recovery does not happen, a rating downgrade may follow.

A ‘Baa3’ rating is still investment grade, though it is the lowest rating in that grade.

While an official reaction from the government was awaited, a top finance ministry official dismissed the ratings agency’s actions. “We are not perturbed. Ratings agencies have been castigated worldwide for missing every possible situation in the past few years. They are now proactively cutting ratings across the world. In relative terms, India is in a very sound position and I frankly think this is of no significance to investors,” the official said.

Moody’s latest action comes weeks after Finance Minister Nirmala Sitharaman presented the ~20-trillion Atmanirbhar Bharat package. The actual fiscal outlay of the package was less than ~2.3 trillion. Moody’s said implementation of key reforms, promised in Prime Minister Narendra Modi’s first term, have been relatively weak and have not resulted in material credit improvements, indicating limited policy effectiveness. “India faces a prolonged period of slower growth relative to the country's potential, rising debt, further weakening of debt affordability and persistent stress in parts of the financial system, all of which the policymaking institutions will be challenged to mitigate,” it said.

The agency expects India’s 2020-21 GDP growth to contract by 4 per cent from 4.2 per cent provisional estimates for 201920. It said that thereafter and over the longer term, growth rates will likely be materially lower than in the past.

“While the government responded to the growth slowdown prior to the Covid-19 outbreak with a series of measures aimed at stimulating domestic demand, and recently announced a support package aimed at supporting India's most vulnerable households and small businesses, Moody's does not expect that these measures will durably restore real GDP growth to rates around 8 per cent, which had seemed within reach just a few years ago.”

The agency also pointed towards the persistent stress in the banking sector and the liquidity squeeze in the NBFC sector. “Moody's does not expect the credit crunch in India's undercapitalized financial sector to be resolved quickly.”