Earlier this week, rating agency Moody’s downgraded India’s long-term foreign-currency credit rating by one notch to Baa3. The rating has now been brought in-line with S&P’s and Fitch’s BBB- ratings, which have stood at one notch above junk since 2011 and 2006, respectively. What has been a surprise is that Moody’s has kept the nation on negative watch; this is slightly worrying as a further notch downgrade could see India dip back into junk territory.
Moody’s says: “The credit profile of India is increasingly constrained by relatively low growth, a high debt burden and a weak financial system. The country’s policymaking institutions have been challenged in their efforts to mitigate and contain these risks, which have been exacerbated by the coronavirus pandemic. Mutually reinforcing downside risks from deeper stresses in the economy and financial system could lead to a more severe and prolonged erosion in fiscal strength, exerting further negative pressure on the credit profile.” Moody’s said the negative outlook “reflects mutually reinforcing downside risks from potentially deeper stresses in the economy and financial system that could lead to a more severe and prolonged erosion in fiscal strength than we currently project.”
In April, India took steps to further open its sovereign bond market to international investors in an attempt to integrate itself into global market indices as the nation ramped up dollar-denominated bond issuance. Unfortunately, May’s figures showed that foreign investors held less than half the allowable foreign portfolio limit (FPI), despite the attractive high yields, and a further downgrade to junk will further hamper foreign ownership.
Our proprietary Net Foreign Asset model views India as a 4 star country, having net foreign liabilities less than 25% of GDP and is therefore within our parameters to invest. We have not looked to add a position in India simply because we cannot find value within the region as a lot of bonds trade expensively.