India's rating downgrade will have a little impact on the market as sovereign ratings are not a leading indicator, said Chief Economic Adviser (CEA), Krishnamurthy Subramanian.
Speaking to CNBC-TV18, Subramanian said that the rating agencies have downgraded 33 countries since COVID-19 outbreak while the government has analyzed the impact of rating changes over the last 20 years.
The comment comes after the global credit rating agency Moody's Investors Services on Monday downgraded India's foreign-currency and local-currency long-term issuer ratings to Baa3 from Baa2. It also downgraded India's local-currency senior unsecured rating to Baa3 from Baa2 and its short-term local-currency rating to P-3 from P-2. The outlook remains negative, Moody's said in its release.
Indias's FY20 GDP has come in at 4.2 percent, down from 6 percent last year. Fiscal deficit for FY20 came in at 4.6 percent versus the budgeted estimate of 3.8 percent.
"Debt sustainability is not an issue in India as long as the GDP growth stays around 4 percent. We have analyzed the impact of rating changes over the last 20 years and found that rating changes are not a big event for markets. We should not be guided by rating action," Subramanian said.
The CEA noted that there was significant uncertainty on the demand side as the individuals and businesses can be more conservative with spending.
He expected the precautionary tendency to save among people till the uncertainty prevails.
"Balances in Pradhan Mantri Jan Dhan Yojna accounts have increased which shows people are not spending. The supply-side measures were meant to ensure that employment across the country is not impacted. People are looking for certainty in an uncertain environment. However, the impact on demand through employment is important," Subramanian said.
Further, he also noted that the non-discretionary spending was holding up well.