What Does It Mean For Moody’s To Downgrade India’s Rating To Baa3?

NEW YORK (United States): Moody’s Investors Service on Monday downgraded India’s sovereign rating to ‘Baa3’ from ‘Baa2’, saying there will be challenges in the implementation of policies to mitigate risks of a sustained period of low growth and deteriorating fiscal position.

“Moody’s has also downgraded India’s local-currency senior unsecured rating to Baa3 from Baa2, and its short-term local-currency rating to P-3 from P-2. The outlook remains negative,” the agency said in a statement.

“The decision to downgrade India’s ratings reflects 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 of relatively low growth, significant further deterioration in the general government fiscal position and stress in the financial sector,” added the statement.

The negative outlook reflects dominant, mutually-reinforcing, downside risks from deeper stresses in the economy and financial system that could lead to more severe and prolonged erosion in fiscal strength than Moody’s currently projects, it further said.

A “negative” implies India could be rated down further.

The agency has provided the following four main reasons behind its decision:

1. Weak implementation of economic reforms since 2017
2. Relatively low economic growth over a sustained period
3. A significant deterioration in the fiscal position of governments (central and state)
4. And the rising stress in India’s financial sector

Have is a brief encapsulation of the decisions by the Moody’s:

Baa3 Rating:

Baa3 is the subdivision of Baa, a credit rating for long-term bonds and investments by Moody’s. The Baa is divided into – Baa1, Baa2, Baa3 and Baa.

A Baa represents a bond or investment of relatively low-risk. Banks are permitted to make an investment in Baa rated bonds.

Baa3 is the lowest investment grade in Moody’s rating scale.

If an economy is rated as Baa3, it implies that it is just one notch above the junk or non-investment grade.

Baa3 rating represents a relatively low-risk investment or bond. Investors, who look forward to making low-risk investments, exercise caution in Baa3, especially when the rating has been downgraded recently.

It may be noted that the ratings are based on the overall health of the economy and the state of government finances. A rating downgrade means that bonds issued by the Indian governments are now “riskier” than before because weaker economic growth and worsening fiscal health undermine a government’s ability to pay back.

Lower risk is better because it allows governments and companies of that country to raise debts at a lower rate of interest.

When India’s sovereign rating is downgraded, it becomes costlier for the Indian government as well as all Indian companies to raise funds because now the world sees such debt as a riskier proposition.

In November 2017, Moody’s upgraded India’s ratings to Baa2, which was based on expectations that the implementation of key reforms will strengthen India’s credit profile. However, since then the implementation of reforms has been relatively weak and did not result in improvement in material credit.

India’s GDP was estimated at 4.2 per cent in the year 2019-20, which is the slowest rate since 2009. Moody’s forecasts that India’s GDP will contract to 4% in the current fiscal 2020-21. Even the RBI Governor  Shaktikanta Das has accepted that the Indian economy will contract in 2020-21.

from League of India