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Moody’s India downgrade shocks analysts, adds to worries amid pandemic

This is not the time to downgrade the rating of a country, says Deven Choksey.

, ETMarkets.com|
Last Updated: Jun 01, 2020, 09.14 PM IST
The ratings agency downgraded India's foreign-currency and local-currency long-term issuer ratings to Baa3 from Baa2.
Mumbai: Market participants expressed shock as Moody’s Investors Service’s downgraded India’s ratings to Baa3 from Baa2, while maintaining a negative outlook.

The ratings agency downgraded India's foreign-currency and local-currency long-term issuer ratings to Baa3 from Baa2, citing 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.

“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.

Here is what market experts had to say:

Madan Sabnavis, Chief Economist, CARE Ratings
Moody's downgrade comes as a surprise because all the countries have been under pressure because of the pandemic. There are concerns about GDP growth, government debt, banking system stress. Government would also have been caught unawares because India was doing better than many other countries if we go by the IMF and the UN. This will lead to higher cost for companies borrowing outside.

Abheek Barua, Chief Economic, HDFC Bank
It was largely anticipated, because Moody’s commentary on India was quite critical and was pointing to downgrade. Moody’s tends to be more focused on short-term cyclical factors unlike its peer S&P which looks more at long-term factors and reforms. Market would see some negative response. I think a negative downgrade by Moody’s was baked into expectations. I don’t think it is a signal that S&P will follow suit.

Deven Choksey, MD & CEO, KR Choksey Shares & Securities
This is not the time to downgrade the rating of a country. In such time of an exceptional situation, the rating of a county doesn’t matter. It is time we bring the economy back to normal.

Abhimanyu Sofat, Head of Research, IIFL Securities
Moody’s decision to lower India's rating is a reflection of the stress in Indian economy and fiscal situation that has been amplified by the virus outbreak. We believe the subdued policy response for short-term alleviation of the lockdown-related stress would lead to subdued economic growth. This is likely to aggravate the weakness in the credit profile of India. The policy of a balancing act seems to have not given the desired results.

V K Vijayakumar Chief Investment Strategist at Geojit Financial Services
Even though it is a downgrade, the rating is still in investment grade. This is on par with the rating of S&P & Fitch. This is unlikely to impact the market materially since the strength of the market is largely due to the humongous liquidity floating in the global financial system. The government needs to prepare a medium-term fiscal consolidation roadmap to inspire confidence in markets. Of course, this is slightly sentiment negative.

Ajay Bodke, CEO (PMS) Prabhudas Lilladher
Rigid, inelastic & ever-rising pressure on government finances from salaries and interest payments juxtaposed against sharply dwindling taxation revenues leading to persistent missing of medium-term fiscal consolidation targets have proved to be the Achilles heel for India's economic downgrade by Moodys. Significantly higher debt burden as compared to peers in the same ratings category and escalating vulnerabilities for the extremely fragile, grossly undercapitalized banking & finance sector due to an expected spike in bad loans will continue to weigh heavily on any prospect of rapid economic recovery. Coming as it does in the midst of a frightening Covid-19 pandemic, the road ahead does look daunting.
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