Moody's downgrades India's rating to Baa3; outlook remains ‘negative’; says move not driven by impact of COVID-19 outbreak

The global rating agency Moody's Investors Service on Monday downgraded India's rating to BAA3 from Baa2, and its short-term local-currency rating to P-3 from P-2."Moody's has adowngraded India's local-currency senior unsecured rating 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 effectively mitigate the risks of a sustained period," it said in a statement.'Baa3' is the lowest investment grade - just a notch above junk status.Moody's noted that the rating downgrade was not entirely driven by the devastating impact of the COVID-19 outbreak."While today's action is taken in the context of the coronavirus pandemic, it was not driven by the impact of the pandemic. Rather, 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," it said. 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, according to the Moody's.Click here to follow LIVE updates on coronavirus outbreakMoody's also lowered India's long-term foreign-currency bond and bank deposit ceilings to Baa2 and Baa3, from Baa1 and Baa2, respectively. The short-term foreign-currency bond ceiling remains unchanged at Prime-2, and the short-term foreign-currency bank deposit ceiling was lowered to Prime-3 from Prime-2. The long-term local currency bond and bank deposit ceilings were lowered to A2 from A1."Although a rating upgrade is unlikely in the near future, Moody's would change the outlook on India's rating to stable if outturns and policy actions were to raise confidence that real and nominal growth will rise to sustainably higher rates than Moody's projects, including through measures which enhance financial stability by strengthening the supervision, regulation and capitalization of the financial sector. Commensurate action to halt and reverse the rise in the debt trajectory, even slowly, would also support a stable outlook" Moody's said in a release. "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 the country's policymaking institutions will be challenged to mitigate and contain," it said.Moody's upgrade of India's ratings to Baa2 in November 2017 was 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.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 said. Real GDP growth has declined from a high of 8.3 percent in fiscal 2016 (ending March 2017) to 4.2 percent in fiscal 2019. Moody's expects India's real GDP to contract by 4.0 percent in fiscal 2020 due to the shock from the coronavirus pandemic and related lockdown measures, followed by 8.7 percent growth in fiscal 2021 and closer to 6.0 percent thereafter, it said."Measures to improve India's fiscal strength, which were at the heart of the government's policy framework a few years ago, have underwhelmed. Fiscal performance in recent years has been weaker than expected, with fiscal deficit targets consistently missed and a persistent lack of clarity on how medium-term fiscal consolidation objectives would be achieved. Rather than beginning to fall, the debt burden remained at around 70% of GDP," Moody's said in a release.