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Implications of rating downgrade

  • June 5, 2020
  • Posted by: admin
  • Category: DPN Topics
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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.
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