India faces downgrade by Moody’s, change in outlook to negative by Fitch: Nomura

Economy


Mumbai: India is on the cliff ’s edge of an imminent downgrade by Moody’s and an outlook change by Fitch to negative in the backdrop of coronavirus outbreak and lockdowns that have derailed fiscal discipline and are biting into growth, said Japan-headquartered Nomura in a research note.

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.

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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.

Fitch Ratings on Tuesday said India’s sovereign rating could come under pressure if there is further deterioration in fiscal outlook as a result of lower growth or fiscal easing.

FISCAL RISKS

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.



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