Moody’s downgrades India Rating 1st Time In 22 Years – Free PDF Download

• Sovereign rating

THE OUTLOOK

• Negative 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.
• ‘Baa3’ is the lowest investment grade – just a notch above junk status.

1^ST TIME IN 22 YEARS

• The downgrade by Moody’s comes nearly 22 years after it lowered India’s rating on June 19, 1998 in the aftermath  of the country’s nuclear tests.
• Moody’s has been historically the most optimistic about India.
• Now it is in line with the other two main rating agencies in the world — Standard & Poor’s (S&P) and Fitch.

REASON FOR THE DOWNGRADE?

1. Weak implementation of economic reforms since 2017.
2. Relatively low economic growth over a sustained period.
3. A significant deterioration in the fiscal position of  governments (central and state).
4. And the rising stress in India’s financial sector.

• In particular, Moody’s has highlighted persistent structural challenges to fast economic growth such as- “weak infrastructure, rigidities in labor, land and  product markets, and rising financial sector risks”.

IS THE DOWNGRADE BECAUSE OF COVID-19 IMPACT?

• Moody’s was categorical that while this downgrade is taking place “in the context of the Coronavirus pandemic, it  was not driven by the impact of the pandemic”.
• According to Moody’s “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”.

IMPLICATIONS OF THIS DOWNGRADE?

• A rating downgrade means that bonds issued by the Indian governments are now “riskier” than before.
• It becomes costlier for the Indian government as well as all Indian companies to raise funds because now the world  sees such debt as a riskier proposition.

ON GDP?

• Moody’s aexpects India’s GDP to contract by 4.0% in fiscal 2020 due to the shock from the coronavirus  pandemic and related lockdown measures,
• Followed by 8.7% growth in fiscal 2021 and closer to 0% thereafter.

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