Moody’s downgrade may impact India’s fund-raising
There is some cause for alarm after one of the three big credit rating agencies, Moody’s Investors Service, downgraded India to the lowest investment grade ‘Baa3’ from the earlier ‘Baa2’, and said the outlook for the country continued to be ‘negative’. The slide continues as Moody’s had lowered the outlook on India’s ‘Baa2’ rating to ‘negative’ from the earlier ‘stable’ category in November last year.
This downgrade is significant as it is the only agency that was earlier upbeat on India, upgrading her in November 2017 to ‘stable’, based on the government’s commitment to undertake structural reforms. The other two, Standard & Poor’s and Fitch Rating, had stood their ground back then and maintained a ‘negative’ outlook.
The reasons Moody’s has now given for the downgrade include the low economic growth over a sustained period; the significant deterioration in the fiscal position of the Central and state governments; and the rising stress in India’s financial sector.
Underlying these reasons is Moody’s belief that India’s implementation of structural reforms has been weak since 2017. Moody’s has also clarified that though the downgrade is "in the context of the coronavirus pandemic, it was not driven by it". There is some truth in this, as much before Covid-19 made its presence felt in India, the country’s GDP growth rate had already hit a 11-year low of 4.2 per cent for FY2020.
There are serious implications to the downgrade. Moody’s creditworthiness ranking evaluates the risk the borrower poses to an investor and the measure of loss in the event of a default. Thus, it has just got more difficult for the Indian government to raise funds by issuing bonds as these now will carry more risk of default. This will also impact Indian companies raising funds from offshore investors.
In a more immediate sense, the Moody’s rating will be a damper on our bid to attract companies exiting China. Long-term, the government will have to worry as what Moody’s is saying is that slower growth over a prolonged period will dampen the pace of improving the living standards of people.