Moody’s downgrade after polls

Buneman said that it usually took six weeks for a final review to take place after the date of the original announcement that a review was to be made. In India’s case, the announcement was made on January 8. In which case, the final verdict should be out by February 22. But given the fact that the new government should be in place by mid-March, it is likely that Moody’s will choose to wait for a few moreweeks.

The current rating assigned by Moody’s to India is Baa3/P-1 with a negative outlook. A possible downgrade would mean that India would be placed below investment grade. This would significantly increase the cost of servicing the external debt and also adversely effect the flow of foreign capital into the country.

In the case of India, Moody’s had announced its decision to review India’s rating for a possible downgrade. The rating agency, it may be recalled, had earlier in March 1997 changed India’s outlook from stable to negative.

Just 25 companies of the 20,000 or so that Moody’s has rated over the last 90 years of its existence have turned defaulters in the calendar year in which they were rated as being of "investment grade". This was stated by Richard Miller, who is Moody’s Managing Director – Investor Services for Europe, Middle East and Africa. This, according to his colleague Michael Buneman, shows how good the quality of their ratings are. While not wishing to directly comment on thequality of ratings by various Indian companies, Buneman said that it made sense for investors to actually look behind the ratings and see how credible a company’s ratings were and how well they predicted a company’s ability to repay loans and make interest payments on time.

P K Choudhury, MD of ICRA which has a co-operation agreement with Moody’s, said that his agency, in fact, was doing an internal exercise along similar lines. Choudhury, however, pointed out that he didn’t foresee any agency in India publishing such data till they had a large enough sample.

This could take at least 5-10 years, considering Moody’s started publishing its "default analysis" only 75 years after it first started operations. Rating agencies in India have come under severe flak in recent months for their failure to warn investors of fiascos such as CRB, Mid-East and ITC Classic.