INDIAN RATINGS DOWNGRADED BY MOODY

Fall in Indian Investment Rating

The reason cited by the Moody's Investors Service ratings agency was the slow reform momentum, constrained policy effectiveness and slower growth compared to India’s potential among the reasons for the downgrade

Fall in Indian Investment Rating

Top Current Affairs 3rd June 2020

Source | Indian Express


GS Paper III: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.



Fall in Indian Investment Rating

Key Takeaways

  • The reason cited by the Moody’s Investors Service ratings agency was the slow reform momentum, constrained policy effectiveness and slower growth compared to India’s potential among the reasons for the downgrade.
  • The Baa3 grade by Moody’s is the lowest investment grade in Moody’s rating ladder.

Read More: Foreign Direct Investment (FDI) growth in India


Context: Recently, there has been a fall in the Indian Sovereign Ratings from Baa2 to Baa3 by ratings agency Moody’s Investors Service.

Why there has been a Fall in Indian Investment Rating?

  • The reason cited by the Moody’s Investors Service ratings agency was the slow reform momentum, constrained policy effectiveness and slower growth compared to India’s potential among the reasons for the downgrade.
  • The agency also noted that the Covid-19 pandemic has only amplified the vulnerabilities in India’s credit profile that were present and building prior to the shock.
  • It is to be noted that the rating has been downgraded in the context of the coronavirus pandemic, it was not driven by the impact of the pandemic.

Key Details

According to Moody’s Investor Service, India’s real GDP growth rate will contract by 4% in 2020-21 due to the shock from the coronavirus pandemic and related lockdown measure. It expects the economy to grow 8.7% next financial year and closer to 6% in the subsequent year.

  • India’s GDP growth slipped to an 11-year low of 4.2% in 2019-20.
  • The fiscal deficit also expanded to 4.6% of the GDP as against the revised estimate of 3.8% of GDP in the previous financial year.

The Baa3 grade by Moody’s is the lowest investment grade in Moody’s rating ladder which simply indicates that India is just one notch above the non-investment grade or junk grade.



Also Read: Financial Stability and Development Council (FSDC)


Apart from above a number of other economic issues also comes to play. These includes:

  • Credit Crunch: The rating agency did not expect the credit crunch in the country’s under-capitalised financial sector to be resolved quickly.
  • High Debt Burden: The fiscal constraints point to a higher debt burden for a longer period of time. The lower GDP growth over the medium term will diminish the government’s ability to reduce its debt burden after a significant rise due to the coronavirus economic shock.
  • Lower Tax Revenue: India’s large low-income population will limit the government’s tax revenue base.

The agency also noted that the government response to the growth slowdown prior to the coronavirus outbreak as well as the recent support package for vulnerable households and small businesses is not enough to restore the sustainable GDP growth.



Read More: Asian Development Bank $177 mn Loan to India


What you need to know about Credit Ratings?

A rating agency is a company that assesses the financial strength of companies and government entities, especially their ability to meet principal and interest payments on their debts.

Basically, a credit rating assesses the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation. A credit rating can be assigned to any entity that seeks to borrow money i.e., an individual, corporation, state or provincial authority, or sovereign government.

  • Sovereign credit ratings can give investors insights into the level of risk associated with investing in the debt of a particular country, including any political risk.
  • Sovereign credit ratings are used by investors as a way to assess the riskiness of a particular country’s bonds.
  • It is very essential to obtain good sovereign credit rating for developing countries as it is essential to access funding in international bond markets.
  • The Big Three Credit Rating Agencies: Fitch Ratings, Moody’s Investors Service and Standard & Poor’s (S&P) are the big three international credit rating agencies controlling approximately 95% of global ratings business.
  • In India, there are six credit rating agencies registered under Securities and Exchange Board of India (SEBI). These are:
    1. CRISIL
    2. ICRA Limited
    3. CARE
    4. SMERA
    5. Fitch India
    6. Brickwork Ratings

Read More: 9 Latest RBI Measures to Strengthen Economy in 2020



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