Moody's Investors Service has finally lowered India's foreign currency country ceiling by two notches to speculative grade from investment grade, more than six months after putting the sovering rating on watch for a possible downgrade. The latest ratings have a stable outlook but Moody's will continue to monitor India closely.
India's rating for long-term debt and notes has been downgraded to Ba2 from Baa3 and the foreign currency country ceiling for short-term debt has been downgraded to Not-Prime from Prime-3 down by one notch.. Moody's also lowered the long-term foreign currency bank deposit ceiling to Ba3 from Ba1. For the first time, Moodys has rated the Indian governments domestic debt as speculative in the "Ba2" notch and also "not prime".
Surprisingly, the downgrade by Moody's has been by two notches and not one notch as expected. After the BAA3, the next notch was BA1, after which comes "BA2" where India stands after the rating action. The two notch cut will hurt India badly as the Moody's rating is deeper in the speculative grade than that of Standard and Poor's.
Parties rated Baa offer adequate financial security. However, certain protective elements may be lacking or may be characteristically unreliable over any great length of time. "Ba" rated parties offer questionable financial security. Often the ability of these entities to meet counterparty obligations may be uncertain and thereby not well safeguarded in the future, accroding to the rating definitions of Moody's,
Moody's had put India on rating watch for a possible downgrade on Janury 7, 1998 and then stated that the pressure on the downgrade had intensified after the nuclear bomb blasts. With the latest rating action both Standard and Poor's and Moody's have pegged India in the speculative grade.
Bond ratings affected by downgrade of India foreign currency country ceiling are Industrial Credit and Investment Corporation of India (ICICI), Industrial Development Bank of India, Oil and Natural Gas Corporation, Power Finance Corporation, Reliance Industries, Tata Electric Companies, Tata Engineering and Locomotive.
A press note issued by Moody's said that the government of India has issued no foreign currency-denominated bonds in its own name, accordingly, the downgrade will affect the ratings of those bonds issued by entities domiciled in India that previously were rated higher than the revised country ceiling of Ba2.
In addition, Moody's assigned first-time ratings of Ba2/NP to the rupee-denominated debt of the government of India.
Moody's said that the downgrades reflect its concerns about India's weakening macroeconomic balances, which have become more difficult to correct in the fractious political environment. In particular, the policy framework appears to lack the necessary coherence to quickly address the deterioration in the external trade accounts and the public sector finances.
The rating agency said that political divisiveness over the last few years has been detrimental to substantive progress on structural reform, and pointed to the fact that a loss of foreign investor confidence has led to net withdrawals of institutional capital in recent months, for the first time since 1991. The government's restrictions on non-Indian participation in the divestment of public sector enterprises and property will make it more difficult to attract foreign capital.
Finally, following India's test explosions of nuclear weapons devices last month, the trade and credit sanctions imposed by the U.S. and other countries are likely to hamper efforts to overcome severe infrastructure constraints. Overall, these circumstances exacerbate concerns about whether growth of the economy and of exports can be sufficiently stimulated to reverse the recent weak performance of the external sector and government finances.
