Moody’s Downgrades India’s Sovereign Rating, Maintains Negative Outlook

Moody’s Investors Service on Monday downgraded India’s sovereign rating to ”Baa3” from ”Baa2”, saying there will be challenges in implementation of policies to mitigate risks of a sustained period of low growth and deteriorating fiscal position.

Moody’s Investors Service has downgraded the Government of India’s foreign-currency and local-currency long-term issuer ratings to Baa3 from Baa2. Moody’s has also downgraded India’s local-currency senior unsecured rating to Baa3 from Baa2, and its short-term local-currency rating to P-3 from P-2. The outlook remains negative, Moody’s said in a press release.

The decision to downgrade India’s ratings reflects Moody’s view that the country’s policymaking institutions will be challenged in enacting and implementing policies which effectively mitigate the risks of a sustained period of relatively low growth, significant further deterioration in the general government fiscal position and stress in the financial sector, Moody’s said.

Slow reform momentum and constrained policy effectiveness have contributed to a prolonged period of slow growth, compared to India’s potential, that started before the pandemic and that Moody’s expects will continue well beyond it. Real GDP growth has declined from a high of 8.3 per cent in fiscal 2016 (ending March 2017) to 4.2 per cent in fiscal 2019.

Moody’s expects India’s real GDP to contract by 4.0 per cent in fiscal 2020 due to the shock from the coronavirus pandemic and related lockdown measures, followed by 8.7 per cent growth in fiscal 2021 and closer to 6.0 per cent thereafter.

”Baa3” is the lowest investment grade – just a notch above junk status.

Moody’s had upgrade of India’s ratings to Baa2 in November 2017 based on the expectation that effective implementation of key reforms would strengthen the sovereign’s credit profile through a gradual but persistent improvement in economic, institutional and fiscal strength. Since then, implementation of these reforms has been relatively weak and has not resulted in material credit improvements, indicating limited policy effectiveness.

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