The revision by rating agency Moody’s about India’s investment outlook to negative is likely to impact the government’s fiscal space and the cost of borrowing for PSUs and other corporates that are planning to tap the Masala bond market.

According to finance ministry officials, plans to increase borrowings to spend on infrastructure and social welfare would be crimped by the rating change.

“Rating agencies — Moody’s, S&P and Fitch — will now be watching us keenly to check for fiscal slippages.

This means unless we raise more resources through off-budget sources, plans to increase spending will take a hit,” officials said.

“The outlook change means there are now fewer chances of a big bang spending thrust. Though, there may be more tinkering of policies and more announcements,” said another official, department of expenditure, North Bloc.

Moody’s expects a slippage of 0.4 per cent over the targeted fiscal deficit of 3.3 per cent.

A higher slippage could see it revise India’s rating to near junk.

Two years back, Moody’s had raised India’s sovereign investment rating from just above junk bond to Baa2 after a gap of 14 years.

On Friday while retaining the rating, it changed the outlook of the rating from stable to ‘negative’.

As it is finance ministry belief that its tax collection would be under stress.

A slashing of corporate tax is likely to reduce actual collection by Rs 1-1.2 lakh crore (though the government had initially estimated the give-away to be Rs 1.45 lakh crore).

Direct tax collections for April- September 2019 were 4.7 per cent higher than last year against a target of a growth of 17 per cent, this trend is expected to continue in the October-December quarter.

Officials said on top of lower than expected direct tax collections, indirect tax - GST - collections are also expected to fall short by Rs 60,000 crore or so.

“Further slippages could even mean cuts in expenditure,” officials said.

At the same time, the other casualty is likely to be the slew of Masala bonds that various PSUs and corporate were planning to launch to access cheaper money abroad.

“A rating outlook fall correlates with increased in the coupon (interest) rates. Indian companies raising Masala bonds in the London market or dollar bonds in other markets, unless the companies performance improve its own rating. Sovereign ratings are intrinsically tied with the coupon rates offered to companies from that country,” said Sanjay Bhattacharyya, former MD, State Bank of India.

Moody’s Investor Service changed the ratings outlook of seven sovereign-linked infrastructure issuers, including NHAI, NTPC and NHPC to “negative” from “stable”.

India’s state-run Power Finance Corporation earlier raised $1 billion, with a coupon rate of 4.45 per cent.

With a change in rating outlook, this is likely to go up and with rupee, under pressure in forex markets, the currency insurance would also turn costlier.

“There will naturally be a rethink on such issuances as interest rates are likely to go up as also the currency risk on foreign exchange futures … we expect the rupee to be under slight pressure,” said finance director, power PSU.

Rating change for NHAI, NTPC and NHPC

Moody’s Investor Service changed the rating outlook of seven sovereigns-linked infrastructure issuers, including NHAI, NTPC and NHPC to“negative” from “stable”.

India’s state-run Power Finance Corporationearlier raised $1 billion, with a coupon rate of 4.45 per cent.