All three major global credit rating agencies have assigned the lowest possible investment grade rating to India’s sovereign credit, placing India just one notch above the junk grade. For example, Moody’s Investors Services has assigned Baa3 (stable) rating to India’s sovereign credit, just one notch above the junk rating - C.
The Government of India is making a strong pitch to the rating agencies for upgrade of sovereign credit, arguing that India’s economy is the fastest growing major economy in the world, with strong macroeconomic fundamentals. Many government officials, politicians and market participants have challenged the assessment of these ratings agencies often terming it as unfair.
On the other hand, Moody’s Investors Services has recently flagged high public debt and risks of fiscal slippages ahead of general elections in 2024 to support their rating stance.
Moody’s reportedly said, “As the government balances the commitment to longer-term fiscal sustainability against its more immediate priority of supporting the economy amid high inflation and weak global demand, and ahead of general elections due by May, we expect some risks of fiscal slippage arising from possibly weaker-than expected government revenues”.
Moody’s argued that “India had a relatively high level of general government debt—estimated at around 81.8% of GDP for 2022-23, compared with the Baa-rated median of around 56%—and low debt affordability. India’s debt affordability, in terms of general government interest payments as a percentage of revenues, is estimated at 26% for fiscal 2022-23, compared with the Baa median of around 8.4%.
In social interactions, it is common to hear that many advanced economies with GDP growth of 1-3%, are running public debt much in excess of 100% of GDP. Most notably, Japan’s sovereign credit is rated AAA despite having public debt in excess of 220% of GDP. USA with its economy on the verge of a recession and public debt over 115% of GDP has AAA rating for its sovereign credit.
Recently, a report by the brokerage Morgan Stanley’s India unit, titled “How India has Transformed in Less than a Decade”, was also viral on social media. Thousands of enthusiastic market participants and political campaigners forwarded this 37-page report containing some selective charts & statistics and random hypothetical projections, without actually bothering to read it; leave alone verifying the data with alternative sources, correlating it with related socio-economic parameters or making any comparative analysis with peer groups.
My point is simple, at present the market participants, especially non institutional investors, are extremely positive about the markets. As I had mentioned a couple of weeks ago also, “sentiment of greed is dominating the sentiment of fear” (see here). In their fear of missing out (FOMO), small investors and traders are latching on anything that would support their positioning. Obviously, all bad news is getting ignored while good news is getting amplified.
If you feel that I am being unduly cautious and taking a risk to miss out on the structural bull market in India; you might be wrong. What I am suggesting here is to stay calm and not get carried away by the gravity defying moves in the market. I am religiously abiding by my asset allocation and return targets, disregarding the noise in the market. I shall review my asset allocation at the scheduled date, i.e., end of 1HCY2023 and decide if any changes are required. More on this tomorrow…
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