Moody's downgrades India's ratings to Baa3; maintains negative outlook

The negative outlook, according to Moody's, reflects dominant, mutually-reinforcing, downside risks
Moody’s Investors Service (Moody’s) has downgraded the Government of India's foreign-currency and local-currency long-term issuer ratings to Baa3 from Baa2. The rating agency 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 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,” Moody's said in a release on Monday evening.

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

“While today's action is taken in the context of the coronavirus pandemic, it was not driven by the impact of the pandemic. Rather, the pandemic amplifies vulnerabilities in India's credit profile that were present and building prior to the shock, and which motivated the assignment of a negative outlook last year,” Moody's said.

GDP growth

Most economists had warned against such a move earlier citing the fiscal constraints Covid-19 induced lockdown since March 2020 and the lack of adequate stimulus measures by the government to stem the economic rout. Though the rating agency expects a sharp contraction in economic growth, as measured by the gross domestic product (GDP) in fiscal 2020, it expects the recovery in the following years to be quite sharp.

"Moody's expects India's real GDP to contract by 4 per cent in fiscal 2020 due to the shock from the coronavirus pandemic and related lockdown measures, followed by 8.7 per cent growth in fiscal 2021 and closer to 6 per cent thereafter," the rating agency said in a note.

Government stimulus inadequate

Despite the government’s response to the economic disruption caused by Covid-19 in the form of Rs 20 trillion package, Moody’s feels the measures are inadequate and will not be able to prop-up growth rates anytime soon.

“While the government responded to the growth slowdown prior to the coronavirus 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,” Moody's said.

That apart, the rating agency does not expect the credit crunch in India's under-capitalised financial sector to be resolved quickly. 

“In turn, subdued growth further challenges the banking system's incomplete resolution of legacy non-performing assets and governance reforms, and is likely to further weaken asset quality and the health of banks and non-banking finance institutions (NBFIs),” Moody's said.

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