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Worrisome signs for Indian economy: Perspective from key rating agencies

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@karamyog
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I wrote a post a couple of days ago highlighting the concerns I see about the Indian economy and the stock market. I do not think it is sensible to invest in Indian equities right now. While government data on the economy for this quarter and the previous quarter is not out yet, alarm bells have been rung by rating agencies Moody's and Fitch.

Moody's had earlier expected that the final contraction in the Indian economy for FY21 would be 7%. This was revised upwards from around 13.5% contraction in February. While no comment has been made on that since we will have the real numbers soon, the growth projections for FY22 have been lowered. It expects India to grow by 9% during this fiscal year. I have serious doubts about this figure as India needs to not have lockdowns to achieve this figure. Deflationary trends are being seen in prices of food grains domestically, and inflationary trends in commodities such as crude, and metals. This does not bode well for the rural economy at all, the only savior of India's economy last year.

One of the many concerns highlighted by Moody's, apart from lowering the growth forecast, was India's Debt to GDP ratio crossing 90%. While developed economies can afford indebtedness to that extent, a developing nation such as India cannot as it erodes investor confidence. Reports are also suggesting that so far during the month of May, as well as much of April, Foreign Institutional investors have been massive sellers of Indian assets. The INR has managed to do well during that time, perhaps due to intervention by the Central Bank and Dollar buying by importers. Inflation globally paired with a weakening currency paints an extremely scary picture.

Source

Another indicator of concern is that RBI has yet again opened the debt restructuring scheme this year for Banks. While this does not help address bad loans in any significant way, it does help push the can down the road. The fact that is needed indicated that there is stress building up in banks' loan books.

Fitch was not too kind to India either. However, there pessimism was somewhat lower as highlighted in the following statement -

We expect pandemic-related restrictions to remain localised and less stringent than the national lockdown imposed in [Q2FY21], and the vaccine rollout has been stepped up Source

The lockdowns have been severe and will last the whole month. The vaccination drive in India has been appalling and at the current rate, India will take 3.5 years to vaccinate about 80% of the population. With a daily COVID-19 case count of 400k, multiple mutations of the virus are painting a dangerous picture and health experts are worried about more mutations, some of which may render the vaccine useless.

It will be important to see how things pan out during this year. However, I do see that India is lucky to not have seen a rating downgrade already. With a worsening fiscal situation and significant risks to the economy surfacing, a downgrade will create much more complications for India and its corporations that borrow overseas.

Posted Using LeoFinance Beta