Rupee Weakens As Moody’s Cuts India’s Rating Outlook

The Indian rupee weakened on Friday after Moody’s Investors Service cut the outlook on the country’s sovereign rating, citing a prolonged growth slowdown.

The rupee opened at 71.25 per dollar, down 0.4 percent from Thursday’s close.

Moody’s, in its rating review issued early morning, said there are “increasing risks that economic growth will remain materially lower than in the past.” This partly reflecting lower government and policy effectiveness at addressing long-standing economic and institutional weaknesses than Moody's had previously estimated, the agency said.

Moody’s was the only one of three large rating agencies to upgrade India’s rating in 2017. At this time, the rating agency had said that continued progress on economic and institutional reforms will, over time, enhance India’s high growth potential.

Since then, the economy has slowed considerably and decisions such as the implementation of the Goods and Services Tax have failed to lift government revenues to the extent expected. At the same time, a credit-crunch brought on by the collapse of Infrastructure Leasing & Financial Services has led to a slowdown in segments of the economy serviced by non-bank lenders.

The government, in response to Moody’s review, said that fundamentals of the Indian economy remain quite robust and that India continues to offer strong prospects of growth in near and medium term.

Nomura Global Markets

• The outlook change is a negative surprise but Moody’s was the only rating agency to have upgraded India’s ratings.
• In fact, the upgrade had put Moody’s ratings on India one notch above the other major ratings agencies.
• We do agree with Moody’s underlying economic assessment. We have lowered our GDP growth projections to 4.9 percent year-on-year (from 5.7 percent) in 2019 and to 6.0 percent (from 6.9 percent) in 2020.
• While there are tailwinds in the form of counter-cyclical macro policies, base effects and the government's continued commitment to reforms, the triple balance sheet problem has tightened credit conditions, hindered policy transmission, prolonged the balance sheet deleveraging process and constrained investment.

Ananth Narayan, SP Jain Institute

• Moody’s has a sovereign rating for India, which is one notch above the other rating agencies. What they are probably doing is reviewing that.
• Moody’s prognosis on India’s economic slowdown is probably right. There are issues with the financial system, real estate and government finances are weaker than we care to admit. But they are not saying anything new.
• Since the economy is not doing well and liquidity is easy, our currency can be vulnerable despite the fact that the current account deficit is in check. News of this nature can impact sentiment and impact fund flows a bit.

Mitul Kotecha, TD Securities

• Investors are aware of the issues being faced by the Indian economy. Moody’s outlook revision reinforces those concerns.
• Investors still looking at India’s equity markets positively as benchmark indices hit record highs. Fund flows into debt markets have been tepid due to concerns over government finances.
• Rupee may weaken beyond 72/$ in near-term.

BofAML

• Do not set much score by Moody's downgrade of India's outlook to negative from stable on fiscal and growth risks.
• Fiscal risks are overdone as our expected 0.5 percent of GDP fiscal slippage comes from the corporate tax rate cut.
• See the slowdown as cyclical rather than structural. Reserve Bank of India and Ministry of Finance measures should lead to a shallow recovery by early 2020.

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