Moody's Downgrades India's ranking to Baa3 for First Time in 22 Years

After Moody’s downgraded or turned outlook negative of 20 countries, it was already anticipated that India’s rating would also be downgraded soon. On the pretext of prolonged period of slower growth, rising debt, weakening of debt affordability and stress in financial system, Moody’s recently downgraded India’s ranking to Baa3 with a negative outlook. Apart from this, Moody’s has taken rating actions on 11 Indian banks too. It has also downgraded India’s short-term local-currency rating to P-3 from P-2.

In a statement, Moody’s states that the decision to downgrade India’s ratings reflect Moody’s view that the country’s policymaking institutions will be challenged in enacting and implementing policies which effectively mitigate the risks of a sustained period. It also states that while the action was taken in the context of the coronavirus pandemic, it was not driven by the impact of it; rather it amplifies vulnerabilities in India’s credit profile that were present and building prior to the shock, which motivated the assignment of a negative outlook last year.

Moody’s also lowered India’s long-term foreign currency bond from Baa1 to Baa2, and bank deposit from Baa2 to Baa3, while the long-term local currency bond and bank despite ceilings were lowered to A2 from A1.

Moodys also lowered Indias long term foreign currency bond from Baa1 to Baa2 and bank deposit from Baa2 to Baa3 while the long term local currency bond and bank despite ceilings were lowered to A2 from A1

In a release, it said that although a rating upgrade is unlikely in the near future, it would change the outlook on India’s rating to stable if outturns and policy actions were to raise confidence that real and nominal growth will rise to sustainably higher rates than Moody’s projects, including through measures which enhance financial stability by strengthening the supervision, regulation and capitalization of the financial sector. It further adds that commensurate action to halt and reverse the rise in the debt trajectory, even slowly, would also support a stable outlook.

Looking at the current state of economic growth that coronavirus pandemic has hurt badly, Moody’s expects India’s real GDP to contract by 4 percent in fiscal 2020. But it expects the economy to bounce back to 8.7 percent in fiscal 2021 and close to 6 percent thereafter. Moody’s further states that measures to improve India’s fiscal strength have underwhelmed, while fiscal performance in recent years has been weaker than expected. Fiscal deficit targets been consistently missed. It also stated that instead of the debt burden falling, it remained consistent at around 70 percent of the GDP.