Moody's decision to lower India's rating is a reflection of the stress in Indian economy
and fiscal situation that has been amplified by the virus outbreak. We believe the subdued policy response for short term alleviation of the lockdown related stress would lead to subdued economic growth and lower tax collection. This is likely to aggravate the weakness in credit profile of India. The policy of balancing act seems to have not given the desired results.
Rigid, inelastic & ever-rising pressure on government finances from salaries and interest payments juxtaposed against sharply dwindling taxation revenues leading to persistent missing of medium-term fiscal consolidation targets have proved to be the Achilles heel for India's economic downgrade by Moodys.
Even though it is a downgrade, the rating is still in investment grade. This is on-par with the rating of S&P & Fitch and is unlikely to impact the market materially, since the strength of the market is largely due to the humongous liquidity floating in the global financial system. The government needs to prepare a medium-term fiscal consolidation roadmap to inspire confidence in markets.
That said, the development is slightly sentiment negative.
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