A day after downgrading India’s sovereign rating to the lowest investment grade, Moody’s Investors Service, on Tuesday, cut the ratings of eight non-financial companies, and three banks, including SBI, HDFC and Exim.
On Monday, the global rating agency downgraded India’s sovereign (long term) debt ― both foreign and local currency, to ‘Baa3’ from ‘Baa2’ with ‘negative' outlook.
The spate of sovereign and corporate rating downgrades has put the focus on India Inc’s overseas borrowing, which has reached new highs over the last few years.
While domestic rating agencies, corporate borrowers and investment banking consultants don’t see any adverse impact on the foreign fund flow in the near term, some believe that the cost of borrowing might go up slightly due to the risk aversion of overseas lenders.
“Logically, risk aversion for Indian paper should increase. On the other hand, every economy in the world is in pretty poor shape. Risk premiums could increase but I believe the flow of money into India will not reduce significantly,” said TT Srinivasaraghavan, Managing Director of Sundaram Finance Limited.
Some of the borrowers also said that there could be some increase in the premium on hedging due to rupee volatility, which in turn is the result of the downgrade and the consequent rupee depreciation.
Rishi Anand, Partner, DSK Legal, said since sovereign ratings act as a benchmark for the borrowing activities of both public and private players, overseas lenders are likely to view India as a riskier destination than ever before.
“But the actual quantum of impact may be hard to predict as sovereign rating is only one of the several factors that drive borrowings, and lenders tend to see growth potential based on their own diligence,” Anand said.
He also added that while the borrowing cost of overseas funds may slightly increase in the short term, clubbed with incremental collateral and creation of additional charge over assets of the borrower, the current liberalised ECB regime of India may play a big role in negating the effect of this downward assessment.
Amidst risk aversion in the Indian banking and debt market, lower interest rates abroad and a slew of ECB rationalisation measures taken by the RBI, India Inc’s external commercial borrowing (ECB) touched an historical high of $45 billion in FY20.
Rajat Bahl, Chief Rating Officer, Brickwork Ratings, said that the sovereign rating downgrade (by Moody’s) will not have much impact on ECB inflow since foreign investors will, anyway, look at the lowest ratings and India is already placed in the lowest investment grade by two other rating agencies.
The sovereign rating downgrade by Moody’s has not come as a big surprise for many since the two other global rating agencies ― Standard & Poor (S&P) and Fitch, have already rated India’s sovereign debt rating at BBB- since 2013.
“But if somebody decides to downgrade from here to bring it down below investment grade, that’s when the impact will be higher,” Bahl said.
“A lot of foreign funds allocate their investment based on country ratings, GDP size, and so on. So, if India is moved to sub-investment grade, then funds allocated for BBB emerging markets will stop coming,” Bahl said.
He also added that, “but that will be mitigated to some extent because there is also another set of funds which will invest in sub-investment grade.”
Rajesh Parthasarathy, Managing Director of Mumbai-based GrowTrust Ventures Consultancy, feels there will not be any significant change in the cost of borrowing in the immediate future because of the current rating downgrade.
“Corporate borrowing will be driven by their individual credit rating. The lenders will be evaluating how the individual company was able to withstand the shock of a few months of lockdown,” Parthasarathy said.
“That factor will be playing out much more than the country rating at this stage,” he added.