Is there a risk of another rating downgrade for India and what could that mean?

As of now, India has a sovereign rating at the lowest level in the investment grade by the three rating agencies viz. S&P, Moody’s and Fitch. While Fitch and Moody’s also have a negative outlook on India, S&P has maintained its stable outlook on the Indian sovereign debt. The risk of a downgrade to speculative may be there but not immediately.

In fact, less than a week after downgrading the outlook, Fitch has warned that India was vulnerable to a sovereign downgrade if GDP growth failed to pick up and government debt crossed a certain threshold of 75%. A rate downgrade from the current level would put India in the speculative bracket with negative implications for cost of debt and the INR.

Currently, India’s debt to GDP ratio stands at 70% which is relatively higher than the median ratio of 42% for similar rating category countries. Fitch projected a 5.2% contraction in GDP for FY21 but has also projected aggressive GDP growth of 9.2% for FY22. Debt/GDP at 84% could be a bigger concern as a downgrade could create a downward spiral on the rupee.