Moody’s downgrade on India’s sovereign rating is on expected lines, say analysts. The global rating agency on Monday, citing several concerns such as the prolonged period of slower growth, rising debt, and stress in the financial system coupled with “slow reform momentum and constrained policy effectiveness”, downgraded India’s (foreign and local currency) to Baa3 from Baa2 while keeping the outlook ‘negative’.

In fact, SGX Nifty futures ruled almost flat post announcement; at 8.15 am IST, it was down just 15 points at 9,817.

According to Edelweiss Securities, the negative outlook by Moody’s is a bit puzzling, as it upgraded India in November 2017 amid progress on reforms, stating that the “effective implementation of key reforms” could strengthen India’s sovereign credit profile.

“In any case, with this downgrade, Moody’s ratings is now consistent with other ratings agencies, all of which now rate India at the lowest investment-grade level,” it further said.

Potential impact

The ratings downgrade by Moody’s was largely expected said Deutsche Bank. However, the worrying factor is that the outlook has been maintained at negative, and any potential downgrade in future will push India’s ratings below investment grade, it cautioned. Besides, another potential risk is that other raters may also consider revising outlook to negative, it further said.

However, Edelweiss said: “Historically, across several countries, ratings actions have had muted impact on interest rates and currency beyond the immediate term. Even after the Moody’s upgrade in 2017, bond yields barely moved over the next few days. Perhaps, markets tend to adjust real-time to the evolving macroeconomic and debt dynamic.”

“Overall, we reiterate that any attempts to rein in the fiscal deficit amid slowing growth would only accentuate the dynamic of slowing growth and faltering tax revenues. Hence, reviving growth through fiscal/monetary activism is far more pressing from a debt sustainability standpoint than reining in the fiscal deficit,” the domestic broking firm said.

“In fact, more often than not, trends in growth, credit cycle, direction of monetary policy, the US Fed’s stance, etc are far bigger drivers of bond yields and exchange rate than a rating action,” said Edelweiss.

Bank of America Securities sees the current slowdown as cyclical, driven by three back-to-back shocks: Mid-2018 saw excessive RBI tightening; while nominal lending rates came off in 2019, on RBI easing, falling core WPI inflation led to a spike in real lending rates; and 2020, of course, is seeing the global Covid-19 shock.

"While we expect GDP to contract by 2 per cent in FY-21, FY-22 growth should rebound to 9 per cent," it said and added fiscal stimulus key to support recovery.  

"We continue to argue that fiscal stimulus is the need of the hour, notwithstanding Moody’s. While the Center’s fiscal deficit, at our 6.3 per cent of GDP FY-21 forecast, will overshoot the long-run average by 180 bps, this is surely justified with growth falling nearly 900 bps below potential".

Nirmal Jain, Chairman, IIFL Group, also questioned the rationale behind the downgrade." I  can’t understand the rationale, unless it is downgrading the whole world, as Covid is a global problem and relatively India has been conservative fiscally," he said, adding, "it has also downgraded many good companies in India as well."

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