Rather moody

| Updated on October 07, 2021

Revision in Moody’s outlook to ‘stable’ is welcome but Centre should push for sovereign ratings upgrade

It is difficult to say if Moody’s Investor Services’ decision to revise India’s rating outlook from ‘negative’ to ‘stable’, while holding its sovereign rating at Baa3 — the lowest rung of investment grade — is cause for disappointment or cheer. Yes, it is a relief to know that Moody’s has had second thoughts on its June 2020 view that India’s ratings faced ‘downside risks’ because its policymakers and institutions would struggle to deal with risks to growth arising from a stressed financial system. But its refusal to reverse the downgrade (from Baa2 to Baa3) is disappointing, if we consider that India did not deserve a barely investment grade rating in the first place.

Global ratings agencies are often criticised for changing their views based on shifting goalposts and that seems to apply in this case, too. During its June 2020 downgrade, Moody’s was at pains to clarify that its rating revision was not driven by the pandemic (which had a worldwide impact), but was triggered by structural factors such as low reforms momentum, a stressed financial system and the likelihood of prolonged slow GDP growth caused by weak private investment. India, however, has pushed through material reforms during Covid times, streamlining its labour and FDI laws, driving digitisation, kick-starting privatisation and announcing the National Infrastructure Pipeline, while fine-tuning recovery mechanisms through IBC amendments and a ‘bad bank’. Its banking system has proved more resilient to Covid than previously thought. In its latest rating opinion, Moody’s has taken note of receding risks to the financial system, but cited new credit challenges arising from high general government debt and weaker debt ‘affordability’ due to the pandemic. While Covid has seen India’s general government debt rise to 89 per cent of GDP, advanced economies have indulged in far more profligate stimulus with general government debt-GDP ratios now averaging 122 per cent. While India may be an outlier among emerging economies (ratio of 65 per cent), the likelihood of it defaulting on external obligations — which is what sovereign ratings ultimately capture — is next to zero. The bulk of India’s public debt is held by domestic institutions and it has managed a significant improvement in its external debt-GDP (down from 24 per cent in FY14 to 21 per cent in FY21) and short-term debt-GDP in recent years. With forex reserves recently exceeding external debt, it is also particularly well-placed today to service its obligations. India also has no recorded instance of sovereign default.

The government should continue to push its case with not just Moody’s but also S&P and Fitch (who rate India similarly) to factor in the above and take note of its disciplined fiscal performance in FY21 and FY22 to reconsider their opinions. India’s poor sovereign ratings may not impact the borrowing ability of either its Government or its leading companies. But a better rating can certainly improve India’s optics with foreign portfolio investors who are beginning to participate significantly in its bond market.

Published on October 07, 2021

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