Moody`s downgrades India`s ratings to Baa3, maintains negative outlook

Daniel Fowler
June 2, 2020

"Economic disruption caused by the coronavirus outbreak and the downgrade of the sovereign rating are the key drivers for today's rating actions", the release stated.

"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 has also lowered India's long-term foreign-currency bond and bank deposit ceilings to Baa2 and Baa3, from Baa1 and Baa2, respectively.

Moody's has placed the Baa3 long-term local and foreign currency deposit ratings of Bank of Baroda, Bank of India, Canara Bank and Union Bank of India and their ba3 BCAs under review for downgrade.

"The fact that Moody's has maintained its negative outlook even after the downgrade does not bode very well", said Teresa John, economist at Nirmal Bang Equities Pvt.

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"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 past year", the agency said. According to the agency, growth is expected to pick up to 8.5 percent in the following fiscal year (up from the previous forecast of 7.5 percent).

The downgrade comes a day after the rating agency downgraded India's sovereign rating. In turn, a prolonged period of slower growth may dampen the pace of improvements in living standards that would help support sustained higher investment growth and consumption.

The rating agency said the lower economic growth to diminish the government's ability to reduce its debt burden and the pandemic to increase the debt burden to rise to about 84% of GDP in the current financial year from 72%.

It doesn't expect the credit crunch in the sector to be resolved quickly.

"Worsening government finances as the coronavirus continue to hurt the economy". "While achieving the objectives laid out in these announcements would be credit positive, challenges with implementation of previous reforms suggest that the benefits to medium-term growth will likely be less than intended".

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