Moody's upgrade India's credit rating after 13 years

Gladys Abbott
November 19, 2017

Finance Minister Arun Jaitley told reporters Moody's decision was a "belated recognition" of the steps the government has taken to fix India's $2 trillion economy.

The rating agency simultaneously upgraded India's local and foreign currency issuer rating to Baa2 from Baa3. Also, if foreign investors were willing to pour money into India without bothering much about Moody's - the other major agency, Standard & Poor's, incidentally, hasn't changed its sovereign rating from "BBB-" (lowest investment grade) since January 2007 - how does any upgrade or downgrade matter?

The rating upgrade augurs well for inflows into the local bond market, which has already witnessed solid inflows in 2017.

Moody's Corporation, also known as Moody's, is a 108 year old financial services company from US, which provides credit rating for countries based on their economic growth.

The reforms will complement the existing shock-absorbance capacity provided by India's strong growth potential and improving global competitiveness, Moody's said.

Arvind Chari, Head, Fixed Income & Alternatives, Quantum Advisors, said the ratings upgrade seems to have come at a wrong time as the government is facing pressures on the fiscal front.

The government's move to recapitalise public sector banks (PSBs), along with the insolvency and bankruptcy code, would help address a key weakness in India's sovereign credit profile.

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While upgrading the rating, Moody's cited reforms like the recently-introduced Goods and Services Tax (GST), improvements to the monetary policy framework, measures to clean up non-performing loans and efforts to bring more areas into the formal economy.

This is India's first rating upgrade since 2004, when it was upgraded to Baa3 from Ba1. Radhika Rao, an economist at DBS, said implementation of reforms, a subdued rural sector and weak investment have slowed economic growth while rising oil prices have raised the risks.

Moody's specifically mentioned GST and demonetization while applauding the various reforms undertaken by the government. The one-level step-up from the lowest investment-grade ranking puts India in the league of the Philippines and Italy. The measures should contribute to further strengthening of India's institutions, it said.

Moody's saw Indian economy picking up pace even though the GST and demonetisation have undermined growth over the near term.

Moody's also expected the real GDP growth to moderate to 6.7% in the fiscal year ending in March 2018.

With the government committed to fiscal consolidation, India might not have to wait for 13 long years for next sovereign upgrade by a rating agency, said a SBI report. However, debt traders said the rally was unlikely to last beyond a few days, as the coming heavy bond supply and hawkish inflation outlook were unlikely to change soon.

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