Moody's Investors Service cut India's credit rating outlook to negative, citing a litany of problems from a worsening shadow banking crunch and a prolonged slowdown in the economy to rising public debt.
This prompted a slew of rate cuts by the central bank, while the government rolled out several measures, including a sharp cut in corporate taxes, in a bid to boost growth.
"Government of India has noted that the Moody's Investors Service has today changed the outlook on the Government of India's ratings to negative from stable while keeping the foreign-currency and local-currency long-term issuer ratings unchanged at Baa2", the government said in a statement. "What we need to see for it to stabilize is really growth ticking back up on a more sustainable basis at higher levels and that feeding into the government's ability to raise taxes and bring down fiscal deficit".
The Nifty 50 index fell 0.4% in early trade on Friday, while the rupee weakened to 71.31 against the dollar, versus Thursday's close of 70.965.
The government added that the fundamentals of the economy remained robust, with inflation under check and bond yields low and that India continued to offer strong prospects of growth in the near and medium term.
"However, India continues to be among the fastest growing major economies in the world, India's relative standing remains unaffected", it added.
The Government has undertaken a series of the financial sector and other reforms to strengthen the economy as a whole. The Reserve Bank of India has already cut interest rates five times this year, though lenders aren't passing on that easing to customers. Bank credit to private, non-financial companies accounts for more than half of India's gross domestic product, according to data from the Bank for International Settlements.
Moody's said this could result in another negative shift.