After Moody's Investors Service cut India's credit rating outlook from stable to negative, the government strongly reacted to the development. A statement issued by India's finance ministry, said, "India's relative standing remains unaffected." The government explained that the fundamentals of India's economy remain "quite robust" and the recent series of reforms would stimulate investments and strengthen the economy.
"Government of India has also proactively taken policy decisions in response to the global slowdown. These measures would lead to a positive outlook on India and would attract capital flows and stimulate investments," it said.
"The fundamentals of the economy remain quite robust with inflation under check and bond yields low. India continues to offer strong prospects of growth in the near and medium-term," the finance ministry statement added.
The negative rating seems to be an additional burden on Finance Minister Nirmala Sitharaman, who is proactively taking steps to reverse India's economic fortune.
Despite the government's strong statement, the forecast from Moody's is a matter of concern as India's growth is expected to remain lower due to a mix of factors.
India's foreign currency rating was retained at Baa2, which is the second-lowest investment grade score. Meanwhile, the global ratings agency projected the country's fiscal deficit of 3.7 per cent in the year through March 2020-an increase from the government's target of 3.3 per cent.
In a statement, Moody's said the outlook partly reflects government and policy ineffectiveness in addressing economic weakness, which led to an increase in debt burden which is already at high levels, the rating agency said.
India's economy grew by 5 per cent between April and June, its weakest pace since 2013, as consumer demand and government spending slowed amid global trade frictions.
Moody's also said the country's growth outlook has deteriorated sharply this year, with a crunch that started out in the non-banking financial institutions (NBFIs) spreading to retail businesses, car makers, home sales and heavy industries.
"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," the rating agency said.
While government measures to support the economy should help to reduce the depth and duration of India's growth slowdown, prolonged financial stress among rural households, weak job creation, and, more recently, a credit crunch among NBFIs, have increased the probability of a more entrenched slowdown, it said.
"Moreover, the prospects of further reforms that would support business investment and growth at high levels, and significantly broaden the narrow tax base, have diminished," it said.
"A prolonged period of slower economic growth would dampen income growth and the pace of improvements in living standards, and potentially constrain the policy options to drive sustained high investment growth over the medium to long term," it added.
Fitch Ratings and S&P Global Ratings -- the other two international rating agencies -- still hold India's outlook at stable.