Moody's downgrades India's ratings, keeps outlook negative

02 Jun '20

3 min read

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Moody's Investors Service has downgraded the Indian government’s foreign-currency and local-currency long-term issuer ratings to Baa3 from Baa2. 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 for the country 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.

The negative outlook 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, the company said in a recent press release.

Moody's also lowered India's long-term foreign-currency bond and bank deposit ceilings to Baa2 and Baa3, from Baa1 and Baa2, respectively. The short-term foreign-currency bond ceiling remains unchanged at Prime-2, and the short-term foreign-currency bank deposit ceiling was lowered to Prime-3 from Prime-2. The long-term local currency bond and bank deposit ceilings were lowered to A2 from A1.

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 country's policymaking institutions will be challenged to mitigate and contain.

Moody's upgrade of India's ratings to Baa2 in November 2017 was based on the expectation that effective implementation of key reforms would strengthen the sovereign's credit profile through a gradual but persistent improvement in economic, institutional and fiscal strength.
Since then, implementation of these reforms has been relatively weak and has not resulted in material credit improvements, indicating limited policy effectiveness.

While the downgrade is taken in the context of the COVID-19 pandemic, it was not driven by the impact of the pandemic, Moody’s claimed. 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.

Slow reform momentum and constrained policy effectiveness have contributed to a prolonged period of slow growth, compared to India's potential, that started before the pandemic and that Moody's expects will continue well beyond it.

Real gross domestic product (GDP) growth has declined from a high of 8.3 per cent in fiscal 2016 (ending March 2017) to 4.2 per cent in fiscal 2018-19. Moody's expects India's real GDP to contract by 4 per cent in fiscal 2019-20 due to the shock from the pandemic and related lockdown measures, followed by 8.7 per cent growth in fiscal 2020-21 and closer to 6 per cent thereafter.

Thereafter and over the longer term, growth rates are likely to be materially lower than in the past, due to persistent weak private sector investment, tepid job creation and an impaired financial system. In turn, a prolonged period of slower growth may dampen the pace of improvements in living standards that would help support sustained higher investment growth and consumption.

Moody's does not expect that government support measures will durably restore real GDP growth to rates around 8 per cent, which had seemed within reach just a few years ago.

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