Historic! Moody's downgrades India, forecasts bleak economic outlook

Source :Sify
Author :Sify
Last Updated: Tue, Jun 2nd, 2020, 01:40:56hrs

New Delhi: Moody's Investor Service on Monday forecast a gloomy outlook on India's GDP for FY21. The sovereign credit rating agency in a first in as many as two decades has downgraded its outlook on India and accordingly India's sovereign ratings have been revised from 'Baa2' to 'Baa3'.  

'Baa3' rating is lowest investment grade -- just a notch above 'junk' status. Moody's had last downgraded India's rating in 1998.

It was only in November 2018 that the agency had uplifted India's rating to Baa2 rating. The downgrade is owing to the impact of the coronavirus and a slump in GDP forecast. If the GDP indeed declines by 4%, as Moody's forecasts, this would be the first in as many as 40 years. The country may face a prolonged period of slower growth owing to the first full fiscal contraction.  

Accordingly, India's foreign-currency and local-currency long-term issuer ratings have been downgraded to Baa3 from Baa2. India's local-currency senior unsecured rating too has been lowered to Baa3 from Baa2, and its short-term local currency rating to P-3 from P-2. The outlook remains negative.

The Moody's rating action is at par with S&P and Fitch that have rated India at 'BBB-', the lowest investment grade. The other two rating agencies have also projected India's economy to slip by 5 percent.  

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The agency observed real GDP growth decline from a high of 8.3 per cent in fiscal 2016 (ending March 2017) to 4.2 per cent in fiscal 2019. Moody's expects India's real GDP to contract by 4 per cent in fiscal 2020 (ending March 2021) due to the shock from the coronavirus pandemic and related lockdown measures, followed by 8.7 per cent growth in fiscal 2021 (ending Mar'22) and closer to 6 per cent thereafter.

The agency said, "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."

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

It also said that 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 policymaking institutions will be challenged to mitigate and contain.

The agency said its upgrade of India's ratings to Baa2 in November 2017 was based on the expectation that effective implementation of key reforms would strengthen 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," the agency said.

"Although, a rating upgrade is unlikely in the near future, Moody's 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 capitalisation of the financial sector.