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India’s GDP to contract by 4% in fiscal 2021 & downgraded its sovereign rating to ‘Baa3’ from ‘Baa2: Moody’s

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Moody’s downgrades India’s ratingOn June 1, 2020 Rating agency Moody’s expects India’s real Gross Domestic Product(GDP) to contract by 4% in fiscal 2021 due to the COVID-19 pandemic and related lockdown measures. India’s foreign-currency and local-currency long-term issuer ratings have been downgraded to Baa3 from Baa2. Meanwhile India’s local-currency senior unsecured rating was also reduced to Baa3 from Baa2, and its short-term local currency rating to Prime(P)-3 from P-2. The outlook remains negative.

Other projections of Moody’s

i.GDP- The rating agency expects 8.7% growth in fiscal 2022 and closer to 6% growth after that.

Note– Real GDP growth had declined from a high of 8.3% in FY17 to 4.2%  in FY19.

ii.Debt burden-The pandemic to increase the debt burden about 84% of GDP in the 2020 fiscal  year from 72% in 2019(this is 30% points larger than the Baa median) & the lower economic growth will diminish the government’s ability to reduce its debt burden.  

iii.Bond & deposit ceilings

Long-term foreign-currency bond lowered to Baa2 from Baa1; long-term foreign-currency bank deposit ceilings reduced to Baa3 from Baa2; Short-term foreign-currency bank deposit ceiling declined to P-3 from P-2, short-term foreign-currency bond ceiling remains unchanged at P-2, Long-term local currency bond and bank deposit ceilings were lowered to A2 from A1

What does the downgrade reflect?

As per Moody’s India’s policy makers will be challenged in enacting and implementing policies that mitigate the risks of a sustained period of relatively low growth & further deterioration in the general government fiscal position and stress in the financial sector.

Reasons for the downgrade

The prolonged period of slow growth has started before the pandemic due to slow reform momentum and constrained policy effectiveness.

Negative outlook

The negative outlook reflects dominant, mutually-reinforcing, downside risks from deeper stresses in the economy and financial system which may lead to more severe and prolonged erosion in fiscal strength than Moody’s current projects. Negative implies India could be rated down further.

Moody’s prediction

Moody’s predicts that India’s Rs 20 trillion package measures are inadequate and will not be able to prop-up growth rates anytime soon.

Static

  • In November 2017, Moody’s had upgraded India’s rating to “Baa2” with a “stable” outlook.
  • ‘Baa3’- is the lowest investment grade, just a notch above junk status; Baa2- is the investment grade rating with moderate credit risk
  • P-3: The rating implies the acceptable ability to repay short-term obligations; P-2 The rating states the strong ability to repay short-term debt obligations.

About Moody’s:
Headquarters– NewYork, United States
President & Chief Executive Officer(CEO)– Raymond W. McDaniel, Jr.