Via Financial Times

Indian stocks wobbled on their record-high perch after Moody’s lowered its outlook for the country to negative, citing concern over a deepening economic slowdown and insufficient government action.

The New York-based credit rating agency said it was less confident about the government’s ability to manage the slowdown, which has seen growth in gross domestic product fall to 5 per cent year-on-year between April and June, a six-year low.

Growth has been curtailed by a severe liquidity squeeze, prompted by an intensifying crisis in India’s enormous shadow-banking system and bad loans at its public and private banks.

The negative outlook reflected in part “lower government and policy effectiveness at addressing longstanding economic and institutional weaknesses than Moody’s had previously estimated”, it said. The rating agency cited demand for reforms to labour and land laws in order to boost productivity and stimulate private investment.

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The Bombay Stock Exchange’s Sensex index fell 0.4 per cent during Friday morning trading, having risen to a record of 40,684 points a day earlier. Indian 10-year bonds sold off a little, with yields up 3 basis points to 6.534 per cent, while the Indian rupee weakened to 71.6 against the dollar from 71.

The government retorted that it has undertaken a series of initiatives to counter the slowdown and reform India’s economy, from the corporate-tax cut and real estate investment to scrapping a controversial tax increase on foreign portfolio investors.

“These measures would lead to a positive outlook on India and would attract capital flows and stimulate investments,” the finance ministry 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.”

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Indian stocks have been on a bull run since Prime Minister Narendra Modi’s government announced in September that it would cut corporate taxes from an effective rate of 35 per cent to 25 per cent.

The rally in Indian stocks accelerated this week after finance minister Nirmala Sitharaman announced that the government would commit Rs100bn ($1.4bn) to invest in the country’s struggling real estate sector, helping to restart projects that have become stuck amid a severe credit crunch sparked by a funding squeeze in India’s financial system.

That prompted the stocks of major real estate developers such as DLF to surge higher. The market also got a boost after China and the US on Thursday agreed to remove some tariffs, increasing hopes that the pair would strike a truce after a 20-month trade war.

Moody’s decision to lower its India outlook halted the rally, sparking concerns that further economic deterioration could ultimately lead to an investment downgrade.

The rating agency cited the risk of increasing government debt levels, forecasting a fiscal deficit of 3.7 per cent of gross domestic product in the year ended March 2020. The government in July laid out a target of 3.3 per cent.

Analysts at Nomura cited the risk to Indian equities and earnings from the sharper-than-expected slowdown, and forecast that GDP growth will fall further to 4.2 per cent in the coming quarter.

“With tight domestic credit conditions persisting amid weak global demand, we now expect India’s recovery to be delayed and the pick-up to remain below potential,” it said.

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Additional reporting by Daniel Shane in Hong Kong