There is increasing risk that Moody’s could downgrade India to Baa3 ‘stable’ from Baa2 ‘negative’, bringing it on par with S&P and Fitch, both of which rate India at BBB-, the brokerage said. Fitch could also change outlook on India to negative due to deteriorating debt dynamics and its assessment that India has a poor fiscal track record.
“India’s Achilles heel on ratings remains its parlous state of fiscal affairs. A potential spike in its general government debt from around 70% of GDP to around 75-80% of GDP may possibly trigger a reassessment of ratings, particularly for Moody’s,” said Nomura.
India currently has a sovereign rating of BBB- with a stable outlook from S&P and Fitch — a grade above the junk category. Moody’s rates it at Baa2 and it had changed outlook on India to negative last year.
Nomura said a ratings downgrade to sub-investment grade could dent prospects for India bond flows in the medium term. There are limited implications for the rupee from a Moody’s downgrade but there is a risk from a shift to negative outlook by the other two rating agencies.
“There is a moderate likelihood of an increased interest rate burden adding to the pressure of a ratings downgrade of the fiscal sub-category. In addition, potential recapitalisation of the banking sector in the eventuality that banks’ non-performing assets once again become unsustainably high adds to the contingent liabilities burden, which could have a negative impact,” said Nomura.
FY21 promises to be a year of stiff fiscal headwinds for India, and the targeted central government’s fiscal deficit of 3.5% of gross domestic product (GDP) looks increasingly ambitious, said Nomura. It said the fiscal deficit target is heavily reliant on an aggressive disinvestment and non-tax revenue target, and GDP growth will plummet this year with real GDP growth likely to contract around 0.4% year on year in FY21.
“The central government’s fiscal deficit will rise to around 5.1% of GDP in FY21, with considerable upside risk, depending on the quantum of forthcoming fiscal support. With states’ budgets combined, the consolidated fiscal deficit will expand to around 9.5-10% of GDP, close to record highs in the recent past,” said Nomura.