Explainer: Moody’s did what?

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 What’s up? Moody’s has changed its rating outlook on India, to stable.

Who’s Moody? Ummm…It’s not a who, it’s a what. It’s a rating agency that grades investment risk in credit instruments. Haven’t you heard of Fitch and S&P? They all do the same thing. 

They rate India’s creditworthiness? You catch on quickly, but they don’t really rate a nation’s creditworthiness. They rate the creditworthiness of financial institutions in the country, like banks, and debt instruments in it, like bonds.

Who cares what they think? We should! If they rate us poorly, our cost of borrowing goes up. 

But they didn’t flag the risk from the housing bubble, from 2008:  Did you just Google that? 

Yup: Okay, you are right. None of the big three credit-rating agencies did. But their opinion still matters because there aren’t many of them, that is the Securities and Exchange Commission-authorised ones, around and some of the big funds can only invest in credit instruments rated by these authorised agencies.  

Alright. What is our grade then? BAA3.

What was it before? BAA3.

Uh, what? Then what has changed? Oh, it’s not the rating but the rating outlook that has changed.

Meaning? Our rating is BAA3, as before, but now Moody’s thinks that it won’t get worse but will stay stable.

Why? The economy is recovering better from the pandemic than they thought, with the vaccination drive and the fiscal and monetary measures. Also, they thought banks here would be stuck with their bad assets, or non-performing assets, for long. But our banks seem to be shedding them effectively, and they have managed to raise capital. Now they can lend more and help the economy grow.

How did the banks manage to do all that? There is a lot of money in the market with central banks lowering interest rates to drive growth. Local banks have been able to raise capital by selling shares to institutional investors. Thus, they have shored up their balance sheets and got more ammunition for lending. 

Is India’s BAA3 good? It’s one rank above junk.

Eh, what?! If we have done the turnaround so well, why is Moody’s being tight-fisted? Our government has been borrowing heavily, for one. Its borrowing is getting uncomfortably closer in value to what it produces.

Sort of like a twenty-year-old on his/her first salary? That isn’t fair because governments can’t do without debt… but in this case its debt is much higher than other Baa band countries, which have a median debt of 48 per cent of GDP. India’s has shot up from 74 per cent of GDP in 2019 to 89 per cent of GDP in 2020. Also 26 per cent of the Indian central government’s revenues are going towards interest payments, when the others’ median is around 8 per cent. With all of this debt burden and weaker debt affordability, who is going to give a heavy borrower cheap money, Moody’s expects India’s fiscal strength to remain low. So we are stuck with Baa3.

Oops, can we do better? Moody’s is willing to give us a better grade if we are serious about our financial and economic reforms, and we bring down our fiscal deficit numbers and build a better borrower profile.