Moody's downgrades India's ratings, citing policy challenges

The agency maintained its negative outlook on the country

A pedestrian walks past the Reserve Bank of India in Mumbai. The RBI said it is ready to act to maintain market confidence and preserve financial stability. Bloomberg

Ratings agency Moody’s downgraded India’s foreign currency and local currency long-term issuer ratings from Baa2 to Baa3 while maintaining its negative outlook.

The agency said the decision was driven by the view that “the country's policy-making 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”.

Meanwhile, the negative outlook reflects downside risks from deeper economic stress that could lead to a more severe deterioration in fiscal strength than Moody’s currently projects.

The recent downgrade has brought Moody's ratings in line with those provided by other two main agencies S&P and Fitch.

India, the world's fifth-largest economy, is gradually emerging from one of the strictest lockdowns in place to contain the coronavirus pandemic.

The extended shutdown dented the country's growth rate after it halted nearly all economic activity in late March, which in turn put hundreds of millions out of work almost overnight.

However, Moody's clarified that its recent downgrade was not driven by the pandemic.

“The pandemic amplifies vulnerabilities in India's credit profile that were present and building prior to the shock, and which motivated the assignment of a negative outlook last year,” the agency 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.”

However, the Covid-19 pandemic could complicate India's efforts to revive growth.

Moody's expects India's real gross domestic product to contract by 4 per cent in the 2020 fiscal year, due to the economic shock caused by the pandemic and related lockdown measures.

Prime minister Narendra Modi's administration has revealed a massive stimulus package of $266 billion - equivalent to nearly 10 per cent of the country's GDP - to counter the slowdown induced by the prolonged lockdown. But analysts have expressed doubts about the package's effectiveness considering their allocation and whether it would be enough to feed the much-needed growth and boost employment at such a crucial period.

"Moody's does not expect that these measures will durably
restore real GDP growth to rates around 8 per cent, which had seemed within reach just a few years ago."