Moody’s downgrades India rating to lowest investment grade

Moody’s downgrades India’s sovereign rating to ‘Baa3’ from ‘Baa2’ with negative outlook.

This is one shot away from non investment grade – though it’s unlikely that would happen.

It’s also reasonable to expect that in all likelihood, S&P will follow soon. They are currently one step higher at BBB- with stable outlook. Mostly, they would only come with a change in the outlook from stable to negative. However, it would be interesting to watch what S&P finally does as traditionally they like to position themselves more conservative than Moody’s. However, for them to do anything more currently would mean downgrade to the non investment grade, which is not going to be easy due to various push and pulls !

Irrespective, the current downgrade is going to further complicate the policy making for the Indian government –

  • Any further significant economic deterioration and we are staring at a non investment grade rating. No country wants that.
  • Rating agencies would be watching the developments very closely with greater engagement with the government.
  • This further removes the possibility of any significant fiscal stimulus to revive the economy.
  • On the contrary, with first sign of stabilization and given that the economic activity is expected to be muted for some time, government in order to increase it’s revenues may be compelled to increase direct and indirect taxes. The first immediate candidates are always sin goods and fuel. Besides, it’s important to remember here that over the last one year there have been some tax reductions provided to certain category of taxpayers. I would not be surprised if some of them are restated – at least temporarily.

Opportunists would argue that ratings don’t matter and I might be over analyzing. However, I believe – “ratings might be useless but they are impactful” – especially more so in tough conditions !