Moody’s lowers India outlook to negative

Global ratings agency Moody's Investors Service lowered India’s sovereign credit rating outlook to negative from stable, citing rising risks to economic growth and increased probability of a more entrenched slowdown due to prolonged financial stress among rural households, weak job creation and credit crunch among NBFCs.

The agency affirmed the Baa2 foreign-currency and local currency long-term issuer ratings. A change in outlook to ‘negative’ is at times a precursor to a sovereign ratings downgrade unless things turn for the better. It is also perceived negatively by both investors, global and domestic. Moody’s had upgraded India’s sovereign ratings in November 2017 to Baa2 from Baa3.

The negative outlook indicates an upgrade is unlikely in the near term, Moody’s said, adding it would likely change the outlook to stable if the likelihood that fiscal metrics stabilise and improve over time increased significantly.

“Moody's decision to change the outlook to negative reflects increasing risks that economic growth will remain materially lower than in the past, partly reflecting lower government and policy effectiveness at addressing longstanding economic and institutional weaknesses than Moody's had previously estimated, leading to a gradual rise in the debt burden from already high levels,” the agency said in a statement.

Moody’s estimates that the growth slowdown is in part long-lasting. “Moreover, compared with two years ago when Moody's upgraded India's rating to Baa2 from Baa3, the probability of sustained real GDP growth at or above 8% has significantly diminished,” the agency said.

The latest action from Moody’s comes at a time when economic growth has slowed to an over 6-year low of 5% in the April-June quarter. The government has unveiled a raft of measures to tackle the slowdown and experts say that the steps will yield results in the months ahead. Several multilateral agencies, economists and brokerage houses have trimmed their growth estimates for Asia’s third-largest economy given the slowdown in GDP growth. Several data points have also pointed to the weakness in the economy and the action from Moody's is expected to weigh on sentiment.

Responding to Moody’s action, the government said the fundamentals of the economy remain quite robust with inflation under check and bond yields low and asserted that India offers strong prospects of growth in the near and medium term.

“India continues to be among the fastest growing major economies in the world, India’s relative standing remains unaffected. IMF in its latest World Economic Outlook has stated that Indian economy is set to grow at 6.1% in 2019, picking up to 7% in 2020,” the finance ministry said.

“As India’s potential growth rate remains unchanged, assessment by IMF and other multilateral organisations continue to underline a positive outlook on India,” the ministry said.

The sensex, after trading flat for most of Friday’s session, closed 330 points lower at 40,324 while the rupee weakened by 26 paise to close at 71.31 to a dollar.

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