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In June 2020, three of the large global rating agencies – Moody’s Investors Service (“Moody’s”), Fitch Ratings (“Fitch”) and S&P Global Ratings (“S&P”) reviewed India’s sovereign credit rating. Interestingly, the agencies diverged in their approaches – Moody’s, which had previously rated India a notch higher than S&P and Fitch, downgraded India to ‘BAA3’ from ‘BAA2’ and retained a negative outlook on the rating; Fitch retained India’s sovereign ‘BBB’ rating, but changed the outlook to negative; and S&P reaffirmed India’s ‘BBB’ rating and stable outlook. Across all three agencies, India retains its investment grade rating, but may lose this standard if further downgrades are to follow in what has been a tumultuous time for global financial markets.

The negative rating actions by Moody’s and Fitch were taken in response to the COVID-19 pandemic, but were not solely motivated by it. Both rating agencies have cited India’s prolonged period of low GDP growth and growing debt burden as key reasons underpinning their decision. Moody’s and Fitch both consider that the pandemic (and especially its impact on the major commercial hubs, Mumbai and Delhi) has weakened India’s growth outlook, and expect economic activity to contract by at least 4 – 5% in 2020-21. However, Moody’s has commented that growth had been slowing even before the pandemic, and may remain significantly below potential for the foreseeable future..

Lower GDP growth will make it difficult for the Indian government to reduce its debt burden, which (as with many nations around the world) has grown significantly due to the pandemic. According to Fitch, to improve India’s rating profile the Indian government needs to implement a credible strategy to reduce its overall debt levels over the medium term, post COVID-19. However, both Fitch and Moody’s have expressed concerns over the government’s ability to effectively implement policies which can achieve this. Continued lagging growth and a failure to address government debt after the pandemic could lead to further downgrades by both agencies.

Unlike Moody’s and Fitch, S&P proposes a more positive outlook, stating that India’s GDP growth remains “above average” and the country is well placed to outperform its ‘BBB’ peers in its recovery from the pandemic. However, S&P has acknowledged that COVID-19 has intensified risks to India’s GDP growth, and warned that a lack of a meaningful recovery from 2021 onwards could prompt the agency to consider further downgrades.

From difficulties come opportunities, and against the background of India’s changing sovereign rating, foreign portfolio investors (“FPIs”) seeking higher risk and returns invested over $2.4 billion (net) in Indian capital markets in June 2020. FPIs are likely to benefit from a 10 – 15 basis points increase in longer term yields in bond markets. Shares in state-owned Indian companies may also appeal to FPIs, as Moody’s downgrade of India has caused it to downgrade a number of Indian state-run oil and gas companies to sub-investment grade despite their sound credit profiles.

As mentioned in our previous blog distressed Indian assets, which have become one of the most preferred asset classes for domestic and global investors, were also popular with FPIs in June. JM Financial Credit Alternatives has already raised over $21 million for an India-focused maiden distressed opportunities fund. Other players that have been active in this space recently include the Carlyle Group, which has partnered with SBICAP Ventures Ltd, the investment banking subsidiary of the State Bank of India, to float an India-focused distressed asset fund that could raise up to $1.5 billion.

The potential for growing returns on Indian investments comes at a time when the Reserve Bank of India is relaxing restrictions on external investment significantly. This is to attract foreign capital by making it easier and more economically attractive for FPIs to invest in India. As the tide starts to slowly turn on the COVID-19 pandemic, perhaps we will start to see appealing opportunities in new markets for FPIs looking to invest in India.

If you are interested in learning more about Reed Smith’s India Business Team and how we can help you navigate the Indian marketplace, please contact Gautam Bhattacharyya (, Bobby Majumder ( and Nathan Menon (