Boost for Modi, Moody’s upgrades India’s credit rating after 14 years.

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Boost for Modi, Moody’s upgrades India’s credit rating after 14 years.

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A rating upgrade for India comes at a time when rating agencies Standard and Poor’s (S&P) and Moody’s have cut China’s sovereign rating.

Moody’s said the Indian government is midway through a wide-ranging programme of economic and institutional reforms such as the recently-introduced Goods and Services Tax (GST) that promotes productivity by removing barriers to inter-state trade.

Credit rating agency Moody’s Investors Services upgraded on Friday India’s sovereign ratings to Baa2 from its lowest investment grade (Baa3), giving credit to the Narendra Modi government for its “wide-ranging program of economic and institutional reforms”. It has now changed the outlook for India’s rating to stable from positive.

Sovereign credit ratings are a barometer of a country’s monetary, fiscal and regulatory policy climate. A favourable rating helps governments and companies raise capital in the international financial market. Also, institutional investors rely on ratings in making investment decisions. The rating upgrade comes after a gap of 14 years.

“The decision to upgrade the ratings is underpinned by Moody’s expectation that continued progress on economic and institutional reforms will, over time, enhance India’s high growth potential and its large and stable financing base for government debt, and will likely contribute to a gradual decline in the general government debt burden over the medium term. In the meantime, while India’s high debt burden remains a constraint on the country’s credit profile, Moody’s believes that the reforms put in place have reduced the risk of a sharp increase in debt, even in potential downside scenarios,” Moody’s Investors Services said.

Moody’s, however, warned that India’s rating could be downgraded if its fiscal metrics and the outlook for general government fiscal consolidation deteriorates materially. “The rating could also face downward pressure if the health of the banking system deteriorated significantly or external vulnerability increased sharply,” it said.

The other two key global rating agencies-Standard and Poor’s and Fitch Ratings-have assigned India the lowest investment grade rating with stable outlook. Finance secretary Hasmukh Adhia tweeted: “The path that Government has chosen for long term reforms and fiscal consolidation is well recognised by investors already. The rating agency too has now confirmed it formally, which is welcome.”

Credit Suisse in a statement said the rating upgrade for India is positive for bonds, especially for near term sentiment which has been weak. “But it might not translate into large inflows with most foreign investors already actively investing in India and bond market inflows limited by quotas,” it added.

Moody’s has also raised India’s long-term foreign-currency bond ceiling to Baa1 from Baa2, and the long-term foreign-currency bank deposit ceiling to Baa2 from Baa3. The short-term foreign-currency bond ceiling remains unchanged at P-2, and the short-term foreign-currency bank deposit ceiling has been raised to P-2 from P-3. The long-term local currency deposit and bond ceilings remain unchanged at A1. It has also upgraded India’s local currency senior unsecured rating to Baa2 from Baa3 and its short-term local currency rating to P-2 from P-3.

A rating upgrade for India comes at a time when agencies Standard and Poor’s (S&P) and Moody’s have cut China’s sovereign rating. Moody’s cut China’s long-term local and foreign currency issuer ratings to A1 from Aa3 on May 24 on concerns that the country’s financial strength would erode in the coming years. S&P followed by cutting China’s long-term sovereign credit ratings one notch to A+ from AA- on September 21, holding that its prolonged period of strong credit growth had increased economic and financial risks.

The upgrade came after Moody’s said the Indian government is midway through a wide-ranging program of economic and institutional reforms such as the recently introduced Goods and Services Tax (GST) that promotes productivity by removing barriers to interstate trade. “While a number of important reforms remain at the design phase, Moody’s believes that those implemented to date will advance the government’s objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth. The reform program will thus complement the existing shock-absorbance capacity provided by India’s strong growth potential and improving global competitiveness,” it added.

Among other things, it acknowledged improvements to the monetary policy framework; measures to address the overhang of non-performing loans (NPLs) in the banking system; and measures such as demonetisation, the Aadhaar system of biometric accounts, and targeted delivery of benefits through the Direct Benefit Transfer (DBT) system intended to reduce informality in the economy. “Other important measures which have yet to reach fruition include planned land and labor market reforms, which rely to a great extent on cooperation with and between the States,” it said.

However the rating agency maintained that most of these measures will take time for their impact to be seen, and some, such as the GST and demonetisation, have undermined growth over the near term. Moody’s expects real GDP growth to moderate to 6.7% in the fiscal year ending in March 2018. “However, as disruption fades, assisted by recent government measures to support SMEs and exporters with GST compliance, real GDP growth will rise to 7.5% in FY2018 (2018-19), with similarly robust levels of growth from FY2019 (2019-20) onward. Longer term, India’s growth potential is significantly higher than most other Baa-rated sovereigns,” it said.

Source : https://goo.gl/AVLqDb

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