While the markets have discounted India’s rating downgrade by Moody’s Investors Service, the country’s future policy action should focus on growth so that it remains in investment grade, according to State Bank of India’s (SBI) economic research report, Ecowrap.

“...it seems that the downgrade was not completely unexpected. This is clearly visible in the data that market is not yet impacted by the rating downgrade. BSE Sensex and NSE Nifty rose and even rupee appreciated against the US dollar,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

The 30 stock BSE Sensex and 50 stock Nifty, on Tuesday, ended up 522 points (at 33,825.53) and 153 points (at 9,979.10), respectively.The rupee strengthened to close at 75.36 to a dollar against the previous close 75.5450.

On Monday, Moody’s downgraded India’s ratings from ‘Baa2’ to ‘Baa3’ as it faces a prolonged period of slower growth, rising debt, further weakening of debt affordability, and persistent stress in parts of the financial system. It has maintained the negative outlook.

Baa3 is an investment-grade rating and India continues to remain an investment grade economy, the global credit rating agency said.

SBI’s economic research department observed that so far around 21 emerging and developing countries have registered either a rating and/ or outlook downgrade by the agency.

“This does not come as a total surprise as emerging markets are always more susceptible to rating downgrades, compared to developed economies in times of stress, even if some of them have very low debt-to-GDP ratio, also clearly evident from history,” it added.

Rising debt

Though rising debt is mentioned as one of the reasons for rating downgrade by Moody’s, the department believes sustainability of debt is more crucial issue and currently India’s debt is at sustainable level.

“The rating action is no reflection on the ability of the Government of India to service its debt obligations. The sovereign external debt comprises around 20 per cent of the total external debt. The current level of foreign exchange reserves are sufficient to meet any debt obligations,” said Ghosh.

The report emphasised that the downgrade by Moody’s is unlikely to result in any immediate repercussions on exchange rates and bond spreads on India offshore bonds.

“We are in unprecedented times and there have been a host of sovereign downgrades already. However, we need to be careful that we remain in investment grade and continue to give growth a big push through policy measures,” opined Ghosh.

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