Rating agency Moody’s downgraded India’s foreign currency and local currency long term issuer ratings to Baa3 from Baa2, while maintaining a negative outlook, citing prolonged period of low growth and further deterioration in the government’s fiscal position.

Moody’s said the negative outlook reflects dominant, mutually-reinforcing, downside risks from deeper stresses in the economy and financial system that could lead to a more severe and prolonged erosion in fiscal strength.

Also read: Moody’s Analytics stands by its report

Lowest grade

Baa3 is the lowest in investment grade in Moody’s rating ladder. This means, India is just one notch above the non-investment grade or junk grade.

The rating agency expects the country’s GDP to contract by 4% in the current financial year due to the shock from the pandemic and related lockdown measures. The GDP growth, however, is expected to pick up in the next fiscal to 8.7% and closer to 6% in the year after.

“Thereafter and over the longer term, growth rates are likely to be materially lower than in the past, due to persistent weak private sector investment, tepid job creation and an impaired financial system,” the rating agency said.

Also read: Moody’s downgrades Yes Bank’s ratings

Moody’s had upgraded the country’s rating to Baa2 in November 2017. While downgrading the rating on Monday, Moody’s said while the action is taken in the context of the coronavirus pandemic, it was not driven by the impact of the pandemic.

“Rather, the pandemic amplifies vulnerabilities in India’s credit profile that were present and building prior to the shock, and which motivated the assignment of a negative outlook last year,” the agency said.

Moody’s said slow reform momentum and constrained policy effectiveness have contributed to a prolonged period of slow growth, compared to India’s potential, that started before the pandemic.

The government measures, before and after the lockdown which was aimed to boosting demand, will not ‘durably restore real GDP growth to rates around 8%’, it said.

The rating agency said the lower economic growth to diminish the government’s ability to reduce its debt burden and the pandemic to increase the debt burden to rise to about 84% of GDP in the current financial year from 72%.

“While it should stabilise at that point, it is unlikely to fall materially thereafter,” Moody’s added.

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