The empty threats of rating agencies

India has the lowest possible investment grade rating by the top three rating agencies Standard & Poor's (S&P), Moody's and Fitch. While Moody's and Fitch have a stable outlook on India, S&P is more bearish and has negative outlook on the country. A downgrade by even one notch will bring India to junk status which would lower investor confidence and might result in flight of capital.

 

However, Moody's in its latest review announced today have retained India's rating and its stable outlook. Even while retaining the rating, it has warned of a downgrade if the government adopts policies that harm fiscal and growth scenario or if forex reserves decline significantly or the asset quality of PSU banks deteriorates and high inflation persists.

 

But is it high time for the Indian government to call their bluff. As per data available on Bloomberg, the last time Moody's changed India's rating was in 2004. Fitch changed India's rating in 2006 while S&P has been more active and has downgraded India as early as 2011.

 

Two of the top three agencies have not bothered to change the rating even as the country's GDP slipped from over 9% to 4.4%. What were they waiting for?

 

Moody's has 'threatened' that it will downgrade India if government adopts policies that will affect fiscal and growth scenario. Do they need any more proof than the food security bill passed by the parliament in the monsoon session that is likely to blow a big hole in the economy. 

 

Moody's has warned of a downgrade if high inflation persists. In case they have not noticed, high inflation has persisted over the last few years and continues to do so despite RBI trying its best to reduce it using monetary policies. 

 

Increasingly, it is becoming clear that the worst is over for the country, unless adverse developments in the US and Europe sends another round of shock waves across the globe by squeezing out liquidity. India's GDP has moved higher from 4.4% in June quarter to 4.8% in the September quarter. Current Account Deficit has temporarily being contained to near 1.2% of the GDP. Though fiscal deficit is still a problem, the country has seen worse times in the last few years. 

 

If the agencies have not downgraded the country in its worst period, they would only look foolish if they do it now. In any case their credibility has been questioned over the last few years as crisis after crisis erupted across the globe. 

 

Repeated 'threats' by rating agencies to downgrade, every time they review their rating is losing its value. That's assuming that there is still some left.