Why Moody’s downgraded India’s Rating

Moody's scored 3 for India's ratings

Moody's has recently reduced the issue of Indian Issues (securities) from BAA2 to BA3 in foreign currency and local currency. BAA3 has the lowest investment grade rating.

Moody's Investors Service has maintained India's credit rating from BAA2 to BAA3, keeping the negative outlook. The agency has revealed that the Indian economy may witness long-term slow growth due to the current financial crisis along with the covid-19 epidemic, rising debt and weakening of debt carrying capacity.

While lowering India's rating, Moody's put forth his idea that it would be challenging for Indian policy making institutions to implement their own policies to mitigate and control financial risks.

If an economy is rated as BAA3, it means that the economy is only one notch above junk or non-investment grade.

The BAA3 rating represents a relatively low risk investment or bond. Investors who are eager to make low-risk investments must be cautious in BAA3, especially when ratings have been lowered recently.

Salient feature

In November 2017, Moody's upgraded India's ratings to BAA2, based on the expectation that the implementation of major reforms would strengthen India's credit profile. However, since then the implementation of reforms has been relatively weak and consequently material credit has not improved.

Moody's estimates that India's GDP will come down to 4% in the current financial year 2020-21. Even RBI Governor Shaktikanta Das has admitted that the Indian economy will suffer from recession in the year 2020-21.

Last 22 year Rating index

A weak financial sector, slow GDP growth trajectory, high debt-to-GDP ratio and a slowdown in reform momentum. And these were unfolding much before the new coronavirus pandemic hit the country.