‘Baa3’ IS THE LOWEST INVESTMENT GRADE - JUST A NOTCH ABOVE JUNK STATUS

India is 18-24 months away from being downgraded to ‘junk’. The global credit rating agencies consider a rating of BBB (minus) / Baa3 and above to be ‘investment grade’.

All ratings below that are termed as ‘speculative grade’, more commonly known in bond market parlance as ‘junk’ category.

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 that effectively mitigate the risks of a sustained period. Moody expects a prolonged period of slow growth to continue well beyond the pandemic. India's progress has been hamstrung by tardy implementation of reforms, it noted. There is no imperium to blow up the rating. But Moody's assessment shows how big a risk it is to make monetary policy with a bird's eye view. According to experts, the centre did not provide much-needed oxygen to the economy, which has virtually entered the ICU for fear of downgrading. But at the end of the day, the number has been cut in the assessment book due to the slump of the economy! There are fears that chanting the mantra of labour reform may be a similar boomerang, forgetting the rest of the conditions for attracting foreign investment.

Business models and investment decisions in India are based on nominal GDP growth of 10-14%. Rating agencies overlook the near 30 percentage point difference between India’s public debt to GDP and other emerging market peers with similar ratings, as they expect India’s high growth to solve the high debt issue over time.

We still do not see rating agencies downgrading India just because the general fiscal deficit to GDP will reach over 10% of GDP this year. The key rating sensitivity is whether India will reach its growth potential. The need for continued reforms in India to boost GDP growth is thus very high.

Moody’s upgraded India in 2017 on the back of the implementation of GST and IBC. However, this downgrade, just two years later stating ‘the countries policymaking institutions will be challenged in enacting and implementing policies…’, It is a damning indictment of the government. The nominal GDP growth has been below 10% for the last two years and expected to be so for at least two more years. The banking and financial sector has been in a mess for many years now, Covid-19 was only the straw that broke the camel’s back. Factor reforms of land, labour, and capital remain unresolved. The political economy is not keeping pace with the change in times and, in fact, is making India’s institutions weaker. India’s job creation problem is soon turning the demographic dividend into a disaster. These are indeed constraining growth. No one really talks about 8% real GDP growth anymore. Many will kindly accept 5-6%. This is indicative of the extent to which the expectations have been smothered.

However, experts are of the view that Moody’s downgrade is unlikely to take the Nifty to a new low because the market seems to be climbing a wall of worries on the back of strong liquidity. VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services, " Even though it is a downgrade, the rating is still investment grade. This is on par with the rating of S&P and Fitch Ratings. This is unlikely to impact 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".

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

Achin Chakraborty, principal of the Institute of Development Studies-Kolkata, also lamented that the Centre was keeping a close eye on the crisis even while trying to keep the rating agency happy. Government expenditure on relief projects worth Rs 20 lakh crore is negligible. The poor did not get cash directly. He is questioning the importance of ratings in winning the confidence of investors. "A lot depends on the investment rating of a foreign financial institution in stocks or bonds," he said. But foreign companies that come to do long-term business on average in mills do not pour money just by looking at the ratings. ”

At the start of this decade, India had the potential of becoming a ‘breakout’ nation. Alas, as the decade ends, India will be fighting to prevent a ‘breakdown’.