Moody's rating downgrade not surprising: SBI report

New Delhi, Jun 2 () The downgrade of India's sovereign rating by Moody's has not come as a surprise as global rating agencies have lowered ratings and outlook of about 21 emerging economies following COVID-19 outbreak, SBI said in a report on Tuesday.

India's sovereign rating was downgraded by Moody's to Baa3 with a negative outlook on the pretext of prolonged period of slower growth, rising debt and stress in financial system.

Apart from sovereign rating downgrade, Moody's has taken rating actions on 11 Indian banks.

"...It seems that the downgrade was not completely unexpected. This is clearly visible in the data that market is not yet impacted by the rating downgrade. BSE Sensex and NSE Nifty rose and even Rupee appreciated against the US Dollar.

"...India has not been alone to witness rating downgrade. So far around 21 emerging and developing countries have registered either a rating and/ or outlook downgrade by the agency. This does not come as a total surprise as emerging markets are always more susceptible to rating downgrades compared to developed economies in times of stress even if some of them have very low debt to GDP ratio," SBI in its research report 'Ecowrap' said.

The rating action, the report said, was no reflection on the ability of the Indian government to service its debt obligations.

"The sovereign external debt comprises around 20 per cent of the total external debt. The current level of foreign exchange reserves are sufficient to meet any debt obligations," the report added.

The downgrade was unlikely to result in any immediate repercussions on exchange rates and bond spreads immediately on India offshore bonds, the report said, adding "...we need to be careful that we remain in investment grade and continue to give growth a big push through policy measures".

It further said that in the current situation in India both the key interest rate and GDP are expected to fall further.

"Our nominal GDP growth is likely to contract and based on this our interest-growth differential may turn positive also. Further, if interest rates are higher than expected, then the cost of rolling over a given debt increases," the report said.

There have been studies which show that if the difference between interest rate and nominal growth rate is negative then there is no level of debt which is unsustainable, i.e. the government can borrow easily.

The report also suggested that the government should only think of such interest-growth differential and not slippage in fiscal deficit. NKD CS BAL