The outlook remains negative, although the end of blacklisting is a positive development that decreases our external vulnerability.
Moodys remains concerned about the effectiveness of fiscal consolidation in stabilizing debt. The level of debt stabilization increased from 74% of GNP to 80% in a few months. And the recent PRB announcement will weigh heavily on debt.
It highlights our relatively high debt burden relative to peers; It is also concerned about the inability of monetary policy to fight inflation. Too much liquid injected as a result of the monetary financing of our deficit- An increase in interest rates, however unlikely, would be futile to hold back inflation.
Factors that could lead to a downgrade
A continued deterioration in debt metrics, weaker fiscal policy effectiveness, weakening monetary policy effectiveness as demonstrated by rising inflationary risks would also likely to result in a downgrade. An increase in domestic or external imbalances, as reflected in an increase in price and exchange rate volatility, accompanied by a deterioration in the country’s balance of payments position, could also lead to a downgrade.
The scheming of public debt figures continues - the consolidation adjustment which goes to Rs 16 billion, and the BoM which takes the place of Government to borrow in foreign currency.
More in Sushil’s forthcoming article “All Quiet on the External Front, until …." which concludes that
“Without a critical review of our monetary and fiscal policies, Moody’s might be led to downgrade the country’s sovereign credit rating, which could destabilize the financial sector. A lower rating that just clears investment grade status signals serious economic and financial risks ahead.”
