THE LOSS OF FAITH

On June 1, Moody’s Investors Service, which rates bonds issued by governments and commercial entities, downgraded India’s foreign-currency and local-currency long-term issuer ratings by a notch to ‘Baa3’ from ‘Baa2’, adding that the outlook remained ‘negative’.

- M.G. Arun

This is the lowest investment-grade rating in Moody’s assessment. Bond credit ratings represent the creditworthiness of corporate or government paper.

The reasons Moody’s cited for the downgrade are: weak implementation of economic reforms since 2017, relatively low economic growth over a sustained period, a significant deterioration in the fiscal position of governments (central and state) and the rising stress in the country’s financial sector.

Moody’s downgrade of India’s sovereign rating to Baa3 brings its rating in line with Standard &Poor’s (S&P) and Fitch’s ratings (BBB-), a notch above ‘junk’ status. This comes after Moody’s outlook downgrade to ‘negative’ in November 2019, which it has still maintained, while S&P and Fitch currently have a ‘stable’ outlook for India.

“We think the Moody’s downgrade was impending and is largely priced in by the markets,” says Madhavi Arora, lead economist with Edelweiss Securities. “Any knee-jerk reaction in forex and rates markets would thus likely be short-lived.” Indeed, the stock markets ignored the ratings action, as a downgrade was already expected. In fact, on June 2, the benchmark Sensex rose 522 points to touch 33,826 on the Bombay Stock Exchange on the back of positive sentiment across global markets as economies opened up after a prolonged lockdown.