InvestorQ : Why has Moody’s cut India’s GDP projections but maintained its sovereign rating?
Archita Jajjoo made post

Why has Moody’s cut India’s GDP projections but maintained its sovereign rating?

Niti Shenoi answered.
4 weeks ago

Moody’s, as you rightly said, had downsized India’s GDP growth for FY23, just last week. However, despite the growth downgrade, Moody’s has decided to hold the sovereign ratings and the outlook at the current level. That means; the sovereign rating stays at the current Baa3 levels while the outlook remains at Stable. According to Moody’s, the risks from negative feedback between the economy and financial system have fallen substantially in the Indian case. India has the same equivalent rating from all the 3 top rating agencies.

Moody’s has assigned several reasons for maintaining the rating and the outlook for India at Stable. India’s large and diversified economy with high growth potential is one of the reasons cited by Moody’s. The agency has also underlined that the external position was relatively strong while the domestic government debt funding model was also relatively stable. Moody’s also spoke about the unique resilience during the COVID period as well as during the last few months of macroeconomic and geopolitical headwinds globally.

On the positive side, Moody’s expects India story to improve in the days coming ahead. It expects limited impact of the lag effect of the Russia-Ukraine military conflict or even from higher than anticipated commodity inflation. Even the impact of persistent monetary tightening is unlikely to dent India’s economic prospects. The government policy, including macro management of the monetary system by RBI had helped India tide over fairly appreciably. These things added up to Moody’s retaining India’s rating and outlook.

On the down side, Moody’s highlighted some challenges for Indian economy. India’s low per capita income and high levels of general government debt are an issue. Moody’s has also pointed out that the low debt affordability and limited government effectiveness could be roadblocks to the economy going ahead. However, rating upgrades would only happen if growth potential rose meaningfully beyond expectations. Moody’s is positive on a pick-up in private sector investment combined with a more proactive fiscal policy of the government.