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Moody's cuts India's outlook to 'negative' over concerns of slowing economic growth

08 November 2019

The USD/INR pair witnessed a 30-pips bullish opening gap on Friday and went to refresh three-week highs at 71.30 at the open after the Indian Rupee was heavily hit by Moody's Investor Service downgrade of India's outlook to "Negative" from "Stable".

"Moody's decision to change the outlook to negative reflects increasing risks that economic growth will remain materially lower than in the past, partly reflecting lower government and policy effectiveness at addressing long-standing economic and institutional weaknesses than Moody's had previously estimated, leading to a gradual rise in the debt burden from already high levels", it said in a release.

India's economy grew only 5 percent year-on-year (YoY) between April and June, its weakest pace since 2013, as consumer demand and government spending slowed amid global trade frictions.

However, increased financial stress on rural households, weak job creation, and a credit crunch among non-bank financial institutions raised the possibility of a more entrenched slowdown, it said. Easy global liquidity conditions combined with better-than-expected Q2 earnings, a series of government stimulus measures and five back-to-back rate cuts so far this year have spurred foreigners to buy Indian worth $501 million in November, after pumping in more than $2 billion in October.

The slowdown "has been deeper and longer than anticipated", William Foster, vice president of Moody's Sovereign Risk Group, said in an interview with Bloomberg TV's Rishaad Salamat.

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India's finance ministry reacted to the statement by saying that the country "continues to be among the fastest growing major economies in the world".

Steps taken by the government to strengthen the economy "would attract capital flows and stimulate investments", it said.

The agency, however, has retained India's credit rating at Baa2.

The government claimed "fundamentals of the economy" were "quite robust with inflation under check and bond yields low".

The downgrade to the outlook puts additional pressure on authorities to kickstart the economy, although they have limited room to move.

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The agency said it does not expect the credit crunch among non-bank financial institutions to be resolved quickly.

India's benchmark equity indices opened marginally lower on Friday, following reports of rating outlook cut.

It said the negative outlook indicates that an upgrade is unlikely in the near term.

The Indian rupee opened on a cautious note and fell 30 paise to 71.27 against the U.S. dollar in early trade on Friday after Moody's changed its India rating outlook to negative citing lower economic growth.

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Moody's cuts India's outlook to 'negative' over concerns of slowing economic growth