Konsult

Moody’s Rating and Its Impact on India

Recently, Moody’s downgraded India’s rating and outlook citing relatively low growth in the near future. In this edition, we explore the reasons being the action taken by Moody’s and the visible impact on the Indian economy since the downgrade. We then take a look at the road ahead for India and takeaways from this incident.

This year has seen a lot happening in various economies in the world. On June 1, 2020, Moody’s downgraded India’s ratings to ‘BAA3’ from ‘BAA2’ and also maintained the outlook from ‘stable’ to ‘negative’. Moody’s rates debt securities which include government/municipal/corporate bonds, money market funds, and fixed income funds. The ratings by Moody’s Investors Service and its other competitors are useful for the investors and hence they play a key role in global capital markets as well where they work as credit analysis provider for banks and other financial institutions and help in assessing the risk of particular securities.

According to the rating agency, the decision was driven by the low growth of the Indian economy as compared to the potential and concerns over debt affordability. ‘BAA3’ is the lowest investment grade and negative outlook means that India could be subject to another downgrade in the future.

As per Moody’s “the pandemic amplifies vulnerabilities in India’s credit profile that was present and building prior to the shock, and which motivated the assignment of a negative outlook last year”. While this downgrade is taking place “in the context of the Coronavirus pandemic, it was not driven by the impact of the pandemic”.

Following points are said to have contributed towards Moody’s Decision:

• The low effectiveness of policies in India and the resulting loss of growth momentum is evidenced in the sharp deceleration in India’s GDP growth rates since the upgrade in 2017.

• Worsening of government finances and steady accretion of total government debt. The provisional estimates for GDP growth rate 2019-20 were pegged at 4.2% — the lowest annual growth in a decade — and even these estimates are likely to be revised down further.

• Private-sector Indian companies fared well in the bond market despite a sovereign rating downgrade by Moody’s, as investors focus more on early signs of some improvement in the economy.

• In the stock market, By the time a rating status is cut, financial markets would have already priced that in and moved on. Two hours into Tuesday’s session, Sensex was up 235 points at 33,550 while Nifty traded near the 9,900 mark. India dollar bond investors have moved on after sovereign rate cut. And investments saw an increase.

• There have been some signs of nascent economic recovery as India begins to ease the world’s most stringent restrictions. After 122 million people lost their jobs as a result of a nationwide lockdown, the total number of people employed increased by 21 million in May even before the gradual lifting of the restrictions, according to the Center for Monitoring Indian Economy Pvt. Data released two weeks back.

• The downgrade was expected, It’s been officially accepted by none other than the Reserve Bank of India Governor that the Indian economy will contract in FY21, and in MNC minutes dated 6 May 2020 it has been said it could take years for the economy to be back on track.

• In our country, the rural economy hasn’t been affected to a large extent, thanks to the recent good harvest. Service sector activity in the nation also picked up slightly last month.

The Road Ahead:

Prepare a roadmap for fiscal consolidation: It is important to recognize that India’s fiscal consolidation is in bad shape. The slippage in fiscal deficit this year is global; that means there is no need to panic. But recognizing that this is unsustainable, we need to prepare a roadmap with clearly defined milestones and declare that we would achieve the same within a time frame.

Favorable factors: We should be aware of our strengths too. Our current account is firmly under control, forex reserves at $500 billion are at an all-time high, humongous global liquidity is keeping the stock market resilient, the rupee is stable and inflation is under control. A single-party majority government with a charismatic PM provides the right setting for bold reforms.

Debt-to-GDP not an immediate worry: Debt-to-GDP ratios are not necessarily an appropriate metric by which to determine a country’s economic stability. There is plenty of historical evidence to suggest that a country’s attempt to ‘balance the books’ could come at the cost of sustained economic growth.

Increasing investments important: The top priority now should be to get growth back. This can be done only through policy initiatives to raise the bar of our ‘Ease of Doing Business’ and be able to attract investment on a massive scale, and towards opening up particular public sectors to private investment, while also making the country more attractive to foreign investment by measures as announced by Finance Minister Ms. Nirmala Sitharaman.

Conclusion:

It’s not only India whose rating has gone down, since today Covid-19 has affected countries all over the world dampening the economies. Growth is slow for the world is in lockdown and businesses on the verge of shutting down. But, India as compared to its counterparts has been fairly successful in containing the outburst of Covid-19 in India. Cases are increasing but at a slower rate. And with full opening up of the economy, India can get back on track like it did in the year 1991.

Moody’s rating down a notch is surely seen as a setback. It has been critical of weak implementation of policies since it has upgraded the rating of India in 2017. Also, Moody’s noted that India’s fiscal position increased the risk in its credit profile, implying that India didn’t have much wiggle room concerning public expenditure to stimulate demand.

Since rating agencies take a retrospective approach to assign sovereign ratings, and markets are more forward-looking, the way the stock markets have reacted does not seem all that surprising. They are moving forward and Central Bank has done all rate cuts it could have done on its part. Surely, if Moody’s downgrades again India to “Junk” it will be difficult to have foreign investments in the Debt Market. But, it’s too early to comment. S&P has retained its rating and outlook for India and is hopeful of the efficacy of ‘ongoing reforms’ and predicted growth could recover rather smartly on the low base to 8.5% in FY22 from a shrink to 5% in FY 2021.

For now, the Government should, we believe, get above the ratings, and focus on reforms that would improve the economy. As analysts see a bright future for the Indian economy in the long run despite challenges, so do we.

“S&P has retained its rating and outlook for India and is hopeful of efficacy of ‘ongoing reforms’, and predicts that growth could recover rather smartly on the low base to 8.5% in FY22.”

Image source: Pexels free photos

Author: Aayushi Bhargava

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