India’s credit rating cut to lowest investment grade by Moody’s on policy risks

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India’s credit rating was cut to the lowest investment grade by Moody’s Investors Service, citing policy challenges in addressing a prolonged slowdown and the government’s deteriorating fiscal position.

The nation’s long-term foreign-currency credit rating was cut to Baa3 from Baa2, according to a statement. The outlook remains negative.

“The negative outlook reflects dominant, mutually-reinforcing, downside risks from deeper stresses in the economy,” Moody’s said. The stress also to the financial system “could lead to a more severe and prolonged erosion in fiscal strength than Moody’s currently projects.”

India missed its fiscal deficit target for the year ended March even before the worst of the coronavirus hit the economy, with economists seeing the budget sliding deeper into the red this year. That’s leading to calls for the central bank to directly monetize the deficit.

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“The government will be more cautious about direct monetization in primary market,” said Abhishek Goenka, chief executive at India Forex Advisors Pvt. “The government’s aim at debt indices inclusion may also suffer a setback.”

The cut brings Moody’s rating on India on par with S&P Global Ratings and Fitch Ratings Ltd., both of which have a BBB- rating. The rupee fell in offshore trading on the move. The one-month dollar/rupee contract rose to 76.01 before paring gains. It was last up 0.1 percent to 75.84.

The downgrade comes at a time when economic growth in India slowed to 3.1 percent in the first three months of this year, and the coronavirus pandemic pushes the economy toward its first full-year contraction in four decades.

“India faces a prolonged period of slower growth relative to the country’s potential, rising debt, further weakening of debt affordability and persistent stress in parts of the financial system,” the rating company said. These are challenges “the country’s policymaking institutions will be challenged to mitigate and contain.”

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