Moody’s Investors Service on Monday downgraded India's sovereign credit rating for the first time in more than two decades, saying policymakers will be challenged to mitigate risks of low growth, deteriorating fiscal position and financial sector stress. Downgrading India's rating by a notch to 'Baa3' from 'Baa2' assigned in November 2018, Moody's estimated India GDP shrinking by 4% - first full fiscal contraction in more than four decades, as the country faces a period of slower growth.
Accordingly, India's foreign-currency and local-currency long-term issuer ratings have been downgraded to Baa3 from Baa2. India's local-currency senior unsecured rating too has been lowered to Baa3 from Baa2, and its short-term local currency rating to P-3 from P-2. The outlook remains negative.
"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 mitigate risks of a sustained period of relatively low growth, significant further deterioration in the general government fiscal position and stress in the financial sector," it said.
‘Baa3’ rating is the lowest investment grade
Baa3' rating is the lowest investment grade - just a notch above 'junk' status. Moody's had last downgraded India's rating in 1998. 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, it added.
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 Covid-19, and it expects this to continue well beyond the pandemic.
Moody's said India faces a prolonged period of slower growth relative to the country's potential, rising debt, further weakening of debt affordability and persistent stress in parts of the financial system, all of which policymaking institutions will be challenged to mitigate and contain.
