Moody’s credit Ratings: Report on India

India’s worsening water shortage crisis can adversely impact the nation’s credit health while sparking social unrest and exacerbating the volatility in its economic growth, rating agency Moody’s Ratings said in a report recently.

In addition, coal power generators and steel makers are most vulnerable to water stress, Moody’s said.

• Decreases in water supply can disrupt agricultural production and industrial operations, resulting in inflation in food prices and declines in income for affected businesses and communities, while sparking social unrest, as per the report. “This in turn can exacerbate volatility in India’s growth and undermine the economy’s ability to withstand shocks.”
• India is experiencing rapid urbanization and industrialization as its economy advances, exacerbating the strain on already limited water resources, says the report. The country has substantial potential for industrial and urban growth, with the industrial sector contributing 25.7% to GDP in 2022, lower than the G-20 emerging market median of 32%, as reported by the World Bank.

  Additionally, “urban residents accounted for only 36% of the total population in 2022, a figure expected to rise considering the G-20 emerging market median of 76%.” This trend towards industrial and urban expansion will heighten competition for water resources among businesses and residents, according to the report.

India at high risk:

• India is one of the sovereigns that are the most vulnerable to risks associated with water management, the report suggests. India also has the poorest access to basic services including water among G-20 economies, a key component for an assessment of the credit impact of ESG factors, it adds.
• “The agricultural sector consumes the most water and is the largest hirer in India. Changing rainfall patterns and reductions in water availability will make farmers and lower income communities increasingly vulnerable to unexpected drops in production, which will reduce their income, while inflating food prices and increasing social discontent.”

Most vulnerable sectors:

• The report points out that among companies they rate, coal power generators and steel-makers are the most vulnerable to water stress as they heavily depend on water for production. “Growing water shortages can disrupt their operations and hamper their revenue generation, eroding their credit strength.”
• It says, in India, thermal coal power plants are by far the largest consumers of water as the country heavily relies on coal-based power generation.
• “As water shortages worsen, coal power plants in water-stressed areas can face operational disruptions during droughts when securing water for drinking becomes a higher priority than supplying water for businesses.”
• India’s average annual water availability per capita is likely to drop to 1,367 cubic meters by 2031 from an already-low 1,486 cubic meters in 2021, according to the Ministry of Water Resources. A level below 1,700 cubic meters indicates water stress, with 1,000 cubic meters being the threshold for water scarcity, according to the ministry.

The sustainable finance market in India can provide companies and regional governments with a critical avenue to raise funds, it said. Moody’s currently has a Baa3 rating on India with a stable outlook.

Moody’s credit Ratings:

Moody’s Investors Service assigns credit ratings to bonds that reflect the creditworthiness of the issuers and the likelihood of default.

These ratings provide investors with an independent assessment of the risk associated with investing in particular bonds. Moody’s rating scale ranges from Aaa (highest quality) to C (lowest quality), with intermediate ratings that include numbers (1, 2, 3) to indicate relative standing within the categories.

Investment Grade Ratings:

1. Aaa (Prime)
   • Description: Bonds rated Aaa are considered to be of the highest quality with minimal risk.
   • Issuer’s Capacity to Meet Financial Commitments: Extremely strong.
2. Aa (High Grade)
   • Aa1, Aa2, Aa3
   • Description: Bonds rated Aa are of high quality with very low credit risk.
   • Issuer’s Capacity to Meet Financial Commitments: Very strong.
3. A (Upper Medium Grade)
   • A1, A2, A3
   • Description: Bonds rated A are upper-medium grade obligations, with a low credit risk.
   • Issuer’s Capacity to Meet Financial Commitments: Strong.
4. Baa (Medium Grade)
   • Baa1, Baa2, Baa3
   • Description: Bonds rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess speculative characteristics.
   • Issuer’s Capacity to Meet Financial Commitments: Adequate.

Non-Investment Grade (Speculative) Ratings:

1. Ba (Speculative)
   • Ba1, Ba2, Ba3
   • Description: Bonds rated Ba are judged to have speculative elements and are subject to substantial credit risk.
   • Issuer’s Capacity to Meet Financial Commitments: Questionable.
2. B (Highly Speculative)
   • B1, B2, B3
   • Description: Bonds rated B are considered speculative and are subject to high credit risk.
   • Issuer’s Capacity to Meet Financial Commitments: Very questionable.
3. Caa (Substantial Risk)
   • Caa1, Caa2, Caa3
   • Description: Bonds rated Caa are of poor standing and are subject to very high credit risk.
   • Issuer’s Capacity to Meet Financial Commitments: Extremely weak.
4. Ca (Extremely Speculative)
   • Description: Bonds rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
   • Issuer’s Capacity to Meet Financial Commitments: Extremely uncertain.
5. C (Default)
   • Description: Bonds rated C are the lowest-rated class of bonds and are typically in default, with little prospect for recovery of principal or interest.
   • Issuer’s Capacity to Meet Financial Commitments: Likely in default.

Modifier Rankings:

• Moody’s applies numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa.
  • A 1 indicates that the obligation ranks in the higher end of its generic rating category.
  • A 2 indicates a mid-range ranking.
  • A 3 indicates a ranking in the lower end of that generic rating category.

Importance of Credit Ratings:

• Investment Decision: Credit ratings help investors assess the risk associated with a bond investment.
• Interest Rates: Bonds with higher credit ratings typically offer lower yields because they are considered safer, while lower-rated bonds offer higher yields to attract investors due to higher risk.
• Market Perception: The credit rating of an issuer affects its ability to raise funds and the terms of borrowing.

These ratings are critical tools for investors, helping them make informed decisions about bond investments based on the issuer’s creditworthiness and the associated risk of default.