Global rating agency Fitch Ratings had recently revised the outlook on India’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable and affirmed the rating at ‘BBB-‘, which is one notch above junk. The rating agency cited the corona virus pandemic as having significantly weakened India’s growth outlook for this year and exposed the challenges associated with a high public-debt burden. Fitch expects economic activity to contract by 5 per cent in the fiscal year ending March 2021 from the strict lockdown measures imposed since March 25, 2020. Rating agencies have been down grading India’s rating continuously now.
On June 1, Moody’s Investors Service downgraded India’s sovereign credit rating for the first time in more than two decades, saying policymakers will be challenged to mitigate risks of low growth, deteriorating fiscal position and financial sector stress. It was downgraded a notch to ‘Baa3’ from ‘Baa2’ assigned in November 2018. It was for the first time that Moody’s downgraded India in the past 22 years.
S&P Global Ratings affirmed ‘BBB-‘ long-term and ‘A-3’ short-term unsolicited foreign and local currency sovereign credit ratings on India in mid-June and said the outlook on the long-term rating is stable.
In the normal course such downgrading would have triggered a debate in the financial circles. But even economists have ignored these downgrading. The stock markets have completely ignored the continuous downgrading of India’s ratings. Why did they ignore it? It points to the complete loss of faith in these global rating agencies.
How did this come about? It was the debt bonds of the companies that these rating agencies have given triple A rating that created a crisis in the market. These companies were downgraded only when they defaulted on returning investments. The rating agencies failed to carry out timely auditing of these companies as well as reliably assess their financial status.
The mechanical ratings that these rating agencies have been following have led to the complete loss of faith in them. Even the United States Government had earlier turned against these rating agencies. India too had called for a regulatory mechanism to assess and evaluate their reliability and accuracy.
The extraordinary situation that COVID-19 has created affected the Government’s income and increased its borrowings forcing rating agencies to downgrade India’s ratings. Most of the governments across the world have been borrowing to meet the special fiscal situation. The ratings have been downgraded mechanically without taking into account the specific crisis situation that is causing fiscal deficit to head north.
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