Why India isn’t worried about Moody’s credit rating cut: Impact to be short lived; investments to keep up

The rating downgrade is less likely to affect the cost of India’s borrowings as a large part of sovereign debt is locally-held.

Moody’s downgrade of India’s sovereign rating to lowest investment grade is mostly being overlooked by investors and economists alike since the effect of the cut is expected to be short-lived on investment flows. Moody’s downgrade was impending and is somewhat largely priced-in by the markets and any knee-jerk reaction in foreign exchange and rates markets would thus likely be short-lived, Madhavi Arora, Economist, Edelweiss, said in a report. With global policy backstops having improved global risk appetite, any outflows associated with Moody’s downgrade alone could be modest, Madhavi Arora added.

The rating downgrade is also less likely to affect the cost of India’s borrowings as a large part of sovereign debt is locally-held. Foreign portfolio investors hold nearly 3.3 per cent of total outstanding government securities. Thus, implications of sovereign ratings downgrade for bonds will likely be less than its peers like Indonesia in Asia’s emerging markets, Madhavi Arora further added.

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Moody’s said that it would change the outlook on India’s rating to stable if it is confident that the new policies will take India to higher real and nominal growth than the rating agency’s projections. While it is the first time in 22 years that India received a near-junk rating from Moody’s, if the debt trajectory is even slightly improved, Moody’s has further assured to provide a stable outlook. However, in the time when the country is already struggling through the coronavirus pandemic, the effect of a rating downgrade is expected to be modest.

Further, the rating cut would not have a material impact on foreign investment flows into India, which would be driven by several other factors. “Even after a downgrade in India’s sovereign rating, it is still an investment grade, so it will not have that great impact,” Hari Hara Mishra, Director UV Asset Reconstruction Company, told Financial Express Online. Besides, the rating is only one among several other factors that drive investment as investors have to see the growth potential based on their own due diligence, Hari Hara Mishra added. He further cited an example that ratings of Argentina were reduced to junk but it used to attract investors for even 100-year bonds.

Recently, RBI Governor Shaktikanta Das also said that the ratings have little to do with the foreign investment as the investors are now well-informed and they base their decisions on the policies and latest business environment in the country. Meanwhile, Prime Minister Narendra Modi has recently announced a special economic package worth Rs 21 lakh crore, which includes short-term and long-term reforms in various sectors, including labour reforms, agriculture reforms, and opening a window of private companies in strategic sectors. With these newly introduced reforms, the Indian government is highly optimistic about India’s growth in the future, which may take India closer to a stable rating in the medium-term.

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