Moody's cuts India outlook to negative, predicts 'prolonged slower growth'

Moody's projects a budget deficit of 3.7% of GDP in the year through March 2020, a breach of the government's target of 3.3%.

India’s credit ratings outlook was cut to negative by Moody’s Investors Service, the first step toward a downgrade, as concerns mount the economic slowdown will be prolonged and debt will rise.

Moody’s projects a budget deficit of 3.7% of gross domestic product in the year through March 2020, a breach of the government’s target of 3.3%, as slower growth and a surprise corporate-tax cut curbs revenue. The foreign currency rating was retained at Baa2, the second-lowest investment grade score.

India’s growth outlook has deteriorated sharply this year, with a crunch that started out in the shadow banking industry spreading to retail businesses, carmakers, home sales and heavy industries. Growth has come down to a six-year low of 5%, with Moody’s saying there’s a low chance of sustained growth at or above 8%.

“A prolonged period of slower economic growth would dampen income growth and the pace of improvements in living standards, and potentially constrain the policy options to drive sustained high investment growth over the medium-to long term,” William Foster, vice president of Moody’s Sovereign Risk Group, wrote in a statement.

The SGX Nifty 50 Index Futures declined 0.4% in Singapore as of 6:57 a.m. in Mumbai. The dollar-rupee one-month non-deliverable forwards rose after the Moody’s statement.

The government said Friday it took note of the Moody’s revision, while flagging the economy continues to be among the fastest-growing major ones in the world.

“India’s relative standing remains unaffected,” the Finance Ministry said in a statement. Steps taken by the government to strengthen the economy “would attract capital flows and stimulate investments,” it said.

The downgrade puts additional pressure on authorities to kickstart the economy, although they have limited room to move. The Reserve Bank of India has already cut interest rates five times this year, though lenders aren’t passing on that easing to customers.

Moody’s said it doesn’t expect the credit crunch among non-bank financial institutions, which were the main source of consumer loans in recent years, to be resolved quickly.

Investors will closely watch the nation’s gross domestic product data for signs of further, long-lasting weakness, which could result in another negative shift, according to Moody’s. Stabilization in the non-bank financial sector, meantime, would be credit positive and could flag less risk of negative spillover into banks.

“There have been some concerns about fiscal slippage,” said Shamaila Khan, director of emerging-market debt at AllianceBernstein in New York.

“If the government is able to maintain discipline and mitigate spending by doing more privatizations that could help allay these concerns. There’s a reasonable probability that that could happen, and this is a negative outlook so it gives them some time to play this out.”

Moody’s rates India one level higher than Fitch Ratings and S&P Global Ratings, with the two latter companies still holding India’s outlook at stable.