Moody's cuts India's rating to lowest investment grade with negative outlook

By Aftab Ahmed

NEW DELHI (Reuters) - Moody's Investors Service downgraded India's credit rating to a notch above junk on Monday, citing a prolonged period of slow growth in Asia's third-largest economy, rising debt and persistent stress in parts of the financial system.

It said the cut to Baa3 from Baa2 was not driven directly by the impact of the coronavirus but that the pandemic had amplified vulnerabilities in India's credit profile that were present and building prior to the shock.

Moody's maintained a negative outlook for the new sovereign rating, citing worsening government finances as the coronavirus continues to hurt the economy.

India's economy grew 3.1% in January-March, its slowest quarterly pace in at least eight years, and Moody's expects a contraction of 4% in the current fiscal year, which runs until March 2021, due to the strict lockdown imposed in April and May.

The change brings Moody's rating into line with Fitch and Standard and Poor's, both of which rate India BBB-, although they assign stable rather than negative outlooks.

Moody's had previously upgraded India's rating from Baa3 to Baa2 in November 2017, which was seen as an endorsement of reforms undertaken by Prime Minister Narendra Modi's government.

The agency said those measures to improve India's fiscal strength, then at the heart of the government's policy framework, had underwhelmed.

Modi's government has announced a number of steps to help the poor and small businesses weather the pandemic, but Moody's said it does not expect the measures to push India's growth rate back towards the 8% that had recently seemed within reach.

(Reporting by Aftab Ahmed in New Delhi and Nishara Karuvalli Pathikkal in Bengaluru; Editing by Uttaresh.V and Catherine Evans)