Moody’s Shocker: What US credit rating downgrade means for global and Indian markets

For the first time in history, the United States no longer has a top-rated ‘AAA’ credit rating from any of the three major international rating agencies, a move that would have a ripple effect on global financial markets. Moody’s Investors Service, which was the last to hold the line since 1919, finally broke on Friday by downgrading the US sovereign rating to ‘Aa1’ while keeping a ‘stable’ outlook.

This is subsequent to previous downgrades by Fitch (to AA+ in Aug 2023) and S&P (as early as 2011), leaving the planet’s biggest economy with no gold-standard credit rating.

Why did Moody’s pull the trigger?

The downgrade, Moody’s explained, is due to America’s increasing fiscal deficit and mounting debt burden, now exceeding USD 35 trillion, significantly more than its own GDP of some USD 29 trillion. The agency cautioned that successive US governments have failed to contain spending and increase revenues, with entrenched political gridlocks making budgetary reforms nearly impossible.

Moody’s forecasts the US deficit to increase to nearly 9 per cent of GDP in 2035, up from 6.4 per cent in 2024. “Interest costs will continue to increase,” the agency warned, adding that this unsustainable trajectory exposes America to economic shocks.

What does this mean for US financial markets?

A sovereign downgrade will generally raise the cost of borrowing. That is, higher US Treasury yields, higher American consumers’ loan and mortgage rates, and possible capital outflows as institutions sell downgraded bonds.

But most analysts believe the effect will be contained in the short term. Wall Street has already dismissed similar announcements, most famously in 2011 following the S&P downgrade — and the dollar’s status as the world reserve currency leaves the US with a large cushion. The Federal Reserve’s credibility and the autonomy of its monetary policy also provide robust insurance.

Indian markets watch closely

Dalal Street might not experience immediate jolts but is not completely insulated as well. With FIIs coming back to Indian equities after selling for weeks, any global risk aversion would turn flows around again. A US Treasury sell-off would strengthen the dollar, devalue the rupee, and Indian bond yields harden.

But domestic fundamentals are robust. “The bigger concern for India is Trump’s tariff talk rather than this downgrade,” say analysts. In the meantime, gold prices may pick up their rally as safe-haven demand resumes.

Though the Moody’s downgrade is historic, it’s not an event that will crash the market. It’s more of a warning signal regarding unsustainable debt and US policy gridlocks not only for Washington policymakers but also for global investors. For India, the immediate prospects depend more on geopolitical news flows and Trump 2.0’s US policy, rather than the downgrade per se.

Be flexible, observe the currents, and follow world signals the markets will quiver, but they are not toppling quite yet.