In view of the poor economy in the wake of the Corona crisis, rating agency Moody’s has slashed India’s sovereign rating. This has added to the challenge for the Indian government as it affects the country’s investment. Moody’s has said that the Indian economy may decline by 4 per cent in this fiscal year i.e. 2020-21.
What Moody’s said
Moody’s has slashed India’s sovereign rating, keeping outlook negative. Earlier, India’s rating was ‘Baa2’, which has been reduced to ‘Baa3’. Moody’s said India is at great risk of severe economic sluggishness, leading to mounting pressure on the fiscal target.
GDP to decline by 4 per cent
According to news agency PTI, Moody’s estimates that India’s gross domestic product (GDP) may decline by up to 4 per cent during the current fiscal. This will be the first time in India’s case in more than four decades that the full-year figures will bring down GDP. With this estimate, Moody’s lowered India’s government credit rating by one notch below BAA2 to ‘BAA3’.
International agencies assess the ability of governments in different countries to repay their borrowings. Economic, market and political risk are based on this. Such a rating indicates whether the country will be able to repay its liabilities in time in the future. These ratings range from top investment grades to junk grades. Junk grades are considered to be in the default category.
How to decide ratings
Agencies typically determine countries’ ratings based on outlook revisions. Agencies divide countries’ ratings into three categories according to the possibility of future action. These categories are negative, stable and positive outlook. Outlook revision is negative, stable, and positive. The rating of a country whose outlook is positive is more likely to be upgraded.
Standard & Poor’s (S&P), Fitch and Moody’s Investors sovereign ratings are fixed all over the world. Moody’s offers baa3 or higher ratings to countries with investment grade. Similarly, the speculative countries have a rating of Ba1 or less.
Moody’s has reduced India’s foreign currency and local currency long term issuer from Baa2 to Baa3. The short term local currency rating has been reduced from P-2 to P-3. Outlook has also been kept negative.
Moody’s upgraded India’s rating from Baa3 to Baa2 in November 2017 after nearly 13 years. Three years later, they have slashed it again.