Ratings agencies have double standards: Official

New Delhi: Rating agencies are following double standards and need to change their methodology to remain relevant, especially in the wake of the Covid-19 crisis, a senior government official said, criticising Moody’s decision to downgrade India’s rating a notch to Baa3 from Baa2.

More than 30 countries had been downgraded since the onset of the Covid-19 crisis and that is because governments have unveiled stimulus packages, the official said, making a case for a review of how countries are rated. The official also said the rating agencies were making selective downgrades, comparing India with Japan. Baa3 is the lowest investment grade rating from Moody’s.

Japan has a debt-GDP ratio of 250 and despite the denominator not growing as fast as India, it still attracted a higher rating, the official said. “Every country is a unique case,” he said. “We have to think--what is the natural safe limit that we can reach?”

India's Debt to GDP ratio is at 72% and is expected to rise especially with revenue falling, the official said. “We are waiting to see how consumption picks up. We don’t expect services to pick up substantially, so that is gone.”

Moody’s pointed to the rise in India’s debt, both Centre and states, as one of the reasons for the downgrade, apart from flagging lack of reform and meaningful fiscal consolidation.

The government feels rating agencies are overcompensating for their earlier failures, having missed financial stress at Infrastructure Leasing and Financial Services (IL&FS), Dewan Housing Finance Corp Ltd (DHFL) and Yes Bank.

“The market has already read us. There is nothing new Moody’s or any other ratings agency is telling them. Stock market is unaffected,” the official said, pointing to the BSE having ended 1.6% points higher on Tuesday, a day after the downgrade. It rose another 0.8% on Wednesday.

The official acknowledged that the downgrade would make overseas borrowing for Indian corporates expensive.

“For the private sector, there is some impact as the rating of the corporate cannot be higher than government’s,” the official said. However, there is enough liquidity in the Indian market, he said.

“Let corporates borrow from Indian banks. Interest rates are all down. They can borrow from the commercial paper market--yield is low, government papers at 5.75%, the marginal cost of funds-based lending rate, the MCLR, which is the minimum interest rate at which banks can lend, is at 7%. In borrowing from abroad, there is always an exchange-rate risk, it will always be 5%-plus,” the official said.

Robust external account
With the fall in crude oil prices and reserves of $480 billion, there is no question of any external commercial borrowings (ECB) payment failure. The government feels India is in a comfortable position.

“So far things are good for us, reserves are high, oil prices are low. So, we don’t see much of a problem right now,” the official said. “If we had to go abroad and raise sovereign debt, only then we would have been in problem… We don’t have any external sovereign debt and we have adequate forex to take care of domestic non-sovereign debt. So, we have all domestic options open, including direct monetization.”