Implications of rating downgrade

Subject: Economy

Context:

International rating agency Moody’s downgraded India’s sovereign rating by a notch to Baa3 from Baa2 with a negative outlook over a weak reform push contributing to a prolonged period of slow growth that it expects to continue beyond the Covid-19 pandemic.

Concept:

• There are four main reasons why Moody’s has taken the decision.

1. Weak implementation of economic reforms since 2017
2. Relatively low economic growth over a sustained period
3. A significant deterioration in the fiscal position of governments (central and state)
4. And the rising stress in India’s financial sector

• Ratings are based on the overall health of the economy and the state of government finances. A rating downgrade means that bonds issued by the Indian governments are now “riskier” than before, because weaker economic growth and worsening fiscal health undermine a government’s ability to pay back.
• It will increase cost of borrowing and investors will not show interest.