Rating agencies are following double standards. They need to change their methodology to remain relevant, especially in the wake of the ongoing COVID 19 crisis. Officials are also criticizing Moody’s decision to downgrade the rating of our country from Baa2 to Baa3.
Comparing India with Japan is a fine example of making selective downgrades, and Baa3 is the lowest investment-grade rating from Moody’s.
Japan has a debt-GDP ratio of 250. Its denominator is not growing as fast as that of India, but it is still attracting a higher rating. Considering how every country is a unique case in itself, we need to ascertain the natural safe limit that we can reach.
India’s Debt to GDP ratio is 72%, and it is expected to rise, especially with falling revenue. Officials are, however, waiting for consumption to pick up; since services won’t pick up substantially, at least for now.
Other than lack of reforms and no meaningful fiscal consolidation, Moody has also pointed out the rising debt of the country in both the center and the state as one of the reasons for this downgrade.
The government believes that these agencies are now overcompensating for their previous failures, having missed the financial stress at Dewan Housing Finance Corp Ltd, Yes Bank, and Infrastructure Leasing and Financial Services (IL&FS).
The market has already read us, as per an official. There is now nothing new that Moody’s or other rating agencies can tell us. The official also stated that the stock market is unaffected. He pointed out the fact that BSE ended 1.6% higher a day after the downgrade, and it rose by another 0.8% the next day. He also acknowledged that the downgrade would make overseas borrowing for Indian corporate quite expensive. However, there is enough liquidity in the Indian market for now.
The solution perhaps is to let corporates borrow from Indian banks. since interest rates are all down, they can borrow from the commercial paper market. Government papers are at 5.75%, and the MCLR (marginal cost of fund-based lending rate), which is the minimum interest rate at which banks can lend is at 7%. However, when it comes to borrowing from abroad, there is always an exchange rate risk, and it will also be more than 5%.
Considering the fall in crude oil prices, and the reserves of $480 billion, a payment failure for external commercial borrowings is out of the question. As per the government, India is in a comfortable position.
As of now, things are good, the official said. Reserves are high and oil prices are low. We do not have external sovereign debt, and we do have adequate forex to take care of all domestic non-sovereign debts. Including direct monetization, we have all domestic options open.