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

Moody's Investors Service on Monday downgraded India's sovereign rating, citing challenges in implementation of policies to mitigate risks of a sustained period of low growth and deteriorating fiscal position. Moody's downgraded Government of India's foreign-currency and local-currency long-term issuer rating, and local-currency senior unsecured rating to "Baa3" from "Baa2", and short-term local-currency rating to "P-3" from "P-2". The outlook remains negative, Moody's said in a press release. The move by the credit ratings major comes at a time when the country remains in the fifth phase of a nationwide lockdown to curb the spread of the coronavirus pandemic, which has pushed the economy into a standstill and forced many businesses to trim operations and lay off part of their workforce.

''Baa3'' is the lowest investment grade rating - just a notch above junk status.

The decision to downgrade the country'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.

Moody's expects the country's real GDP to contract 4.0 per cent in fiscal year 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.

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.