Moody’s has changed India’s outlook from ‘Stable’ to ‘Negative’. What exactly does this mean? How do Rating Agencies decide upon their comments? We all know that weather forecasts are never 100% accurate. Are the forecasters at fault?
Probably not! I am saying so because there are certain indicators, factors and analytical techniques involved which the forecasters depend upon. Forecasts which use these more accurately, predict weather better than others. But, ultimately there’s something called ‘Nature’. Nature has its own plans and no forecaster can change them.
But, why am I talking of weather instead of economy? That’s because they both behave almost in a similar fashion. Just that the forecasters are replaced by Rating Agencies like Moody’s. By the way, Moody’s changed India’s Outlook from ‘Stable’ to ‘Negative’ yesterday, the main reason for writing this newsletter!
Why did Moody’s change India’s Outlook?
Here’s some redundant information. Not that interesting, but important! Although there are many reasons that the rating agency has cited for its prediction, one major reason is that - according to its analysis there are increasing risks that the economic growth will remain ‘materially lower’ than in the past.
Moody’s has partly attributed this to lower effectiveness of government and policy at addressing long-standing economic and institutional weaknesses. Lower than what Moody’s itself had estimated earlier.
So, what effect will this have? This would lead to an increase in debt burden, which is already at a substantially high level.
Moody’s has also said that prolonged stress among rural households, weak job creation and recent credit crunch among Non-Banking Financial Institutions have increased the probability of a more entrenched slowdown.
Does this Really Matter?
Well, Yes! At least the stock investors think so, because Sensex took a dip immediately after the announcement. So, if you’re an equity investor, this will affect you (or your investment). Also, if you’re quite sentimental about India’s global image or by any chance if you’re a core supporter of our ruling political party, you won’t like this for sure.
In that case, there’s a positive news too. Moody’s has affirmed the Baa2 foreign-currency and local-currency long-term issuer ratings. This Big named rating simply means that India has a high ability to repay its short-term debt.
How are the Ratings Decided?
There are macro-economic factors and indicators which play a major role in deciding the comments which Rating Agencies share with the world. It is because of this exact same reason that the India's rating are short-lived and change over time. Remember the analogy that we drew in the beginning with weather?
What can you do about it?
We’ll let the legendary Mr. Warren Buffett answer this on my behalf! In his words – “Be fearful when others are greedy and greedy when others are fearful!”
At this time when market sentiment is going low due to Moody’s India rating, you can actually create value for yourself. We are not saying this, Mr. Buffett is. So, it’s a good time to invest.!