Moodys downgrade: Expect bouts of correction; sell-off in markets unlikely

Marco Green
June 2, 2020

Moody's expects India's real gross domestic product to contract by 4 per cent in the 2020 fiscal year, due to the economic shock caused by the pandemic and related lockdown measures.

Global credit rating agency Moody's Investors Service on Monday downgraded India's sovereign rating to "Baa3" from "Baa2", saying the country faces a prolonged period of slower growth relative to the country's potential amid rising debt and persistent stress in parts of the financial system. India already has the world's worst bad loan pile, and Moody's said subdued economic growth is likely to further weaken asset quality and the health of banks and non-bank financial institutions. According to Bloomberg, Fitch Ratings and Standard and Poor's now rate India one notch below Moody's. "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", it said. Real GDP growth has declined from a high of 8.3% in fiscal 2016 (ending March 2017) to 4.2% in fiscal 2019.

He said lack of support to the poor and small and medium industry indicates that the worst is yet to come.

Further, India's large low-income population will limit the government's tax revenue base as earlier prospects of a broadening of the tax base have not materialised, it said.

Consequently, Moody's downgraded India's foreign-currency and local-currency long-term issuer ratings to Baa3 from Baa2.

Meanwhile, the negative outlook reflects downside risks from deeper economic stress that could lead to a more severe deterioration in fiscal strength than Moody's now projects.

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 capitalization of the financial sector.

The agency said those measures to improve India's fiscal strength, then at the heart of the government's policy framework, had underwhelmed. In short, we have been pushed to a notch above "junk grade".

The Indian Express is now on Telegram.

Other reports by Click Lancashire

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