Moody’s Investors Service has downgraded its outlook on India to ‘negative’ from ‘stable’. The agency, however, has retained India’s credit rating at Baa2.

Moody’s India rating is a notch higher than that of Standard & Poor’s and the outlook revision now may well be to compensate for its past optimism on India.

Reason for changing outlook to negative

Economic growth is expected to remain lower in future than in the past. Government policy has remained ineffective to increase the economic growth. Also, If GDP growth does not return to high rates, Moody’s expects that the government will face high budget deficit and a rise in the debt burden.

The agency further said that while government measures to support the economy should help reduce the depth and duration of India’s growth slowdown, prolonged financial stress among rural households, weak job creation and a credit crunch among non-bank financial institutions (NBFIs) have increased the probability of a more entrenched slowdown.

Credit Rating agencies

“Big Three” credit rating agencies control approximately 95% of the ratings business. Moody’s Investors Service and Standard & Poor’s (S&P) together control 80% of the global market and Fitch Ratings controls a further 15%. The largest credit rating agency in India is CRISIL (Credit Rating Information Services of India Limited). Ratings are based on the lending risks or estimation of the borrower’s ability to repay debt.

India’s position in leading credit ratings

India’s (Government of India) credit rating has remained unchanged for the past several years at ‘BBB (-)’ or at the lowest level on investment grade, which is only a grade above the “junk” status for government/sovereign bonds.

Rating scheme of the Big Three

Moody’s

S&P

Fitch

Rating description

Long-term

Short-term

Long-term

Short-term

Long-term

Short-term

Aaa

P-1

AAA

A-1+

AAA

F1+

Prime

 

Aa1

AA+

AA+

High grade

 

Aa2

AA

AA

 

Aa3

AA−

AA−

 

A1

A+

A-1

A+

F1

Upper medium grade

 

A2

A

A

 

A3

P-2

A−

A-2

A−

F2

 

Baa1

BBB+

BBB+

Lower medium grade

 

Baa2

P-3

BBB

BBB

F3

 

Baa3

BBB−

A-3

BBB−

 

Ba1

Not Prime

BB+

B

BB+

B

Non-investment grade
speculative

 

Ba2

BB

BB

 

Ba3

BB−

BB−

 

B1

B+

B+

Highly speculative

 

B2

B

B

 

B3

B−

B−

 

Caa1

CCC+

C

CCC+

C

Substantial risks

 

Caa2

CCC

CCC

 

Caa3

CCC−

CCC−

 

Ca

CC

CC

Extremely speculative

 

C

C

Default imminent

 

C

RD

D

DDD

D

In default

 

/

SD

DD

 

/

D

D

 


Source: The Hindu

Relevant for GS Prelims & Mains Paper III; Economics