Moody's Investors Services upgraded India's sovereign rating for the first time in nearly 14 years on Friday, saying the country was poised for fast growth because of wide-ranging economic and institutional reforms by Prime Minister Narendra Modi's government.
The US-based agency lifted ratings on India’s sovereign bonds to Baa2 from its lowest investment grade of Baa3, and also changed the outlook for the country’s rating to stable from positive.
Sovereign credit ratings are a barometer of a country’s credit profile and regulatory climate. A favourable rating helps governments and companies raise capital in global financial markets. Also, institutional investors rely on ratings for an indication of a country’s socio-political environment before making investment decisions.
The rating upgrade seen as an endorsement of a range of bold economic decision made by Prime Minister Modi, including the rollout of a landmark Goods and Services Tax that forged India into a unified market. It comes just weeks after the World Bank moved India up 30 places in its annual ease of doing business rankings.
The good news will help the ruling BJP-led government tackle the narrative around the economy, which is growing at its slowest in three years, as it heads into a series of elections over the coming months. All markets including stocks, bonds and rupee rallied on the upgrade.
“We believe that it is a belated recognition of all the positive steps which have been taken in India in the last few years, which has contributed to strengthening of Indian economy,” finance minister Arun Jaitley told a press conference.
“Many who had doubts about India’s reform process would now seriously introspect on their position.”
Shortly after the announcement, Modi led a chorus of ministers and policymakers who tweeted their reaction to the upgrade.
“Moody’s believes that the @narendramodi government’s reforms will improve business climate, enhance productivity, stimulate foreign and domestic investment, and ultimately foster strong and sustainable growth,” Modi tweeted.
Moody’s downgraded China in May, followed by Standard and Poor’s (S&P) which also cut the Asian giant’s sovereign rating.
But Moody’s warned that India’s rating could be downgraded if the management of government finances slipped.
“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.
“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…,” Moody’s said about India, hoping to see a gradual decline in government debts 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.”
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.
Among other things, Moody’s 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.
“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.
Moody's Investors Service on Friday upgraded India's sovereign rating after a gap of 13 years. Rupee, bonds and stocks rallied after the ratings upgrade. Even as most investors, fund managers and CEOs gave a thumbs-up to the move by the global agency, some differed. The credit ratings agency raised India's rating by one notch to Baa2 from Baa3. Moody's also revised its outlook on India to 'stable' from 'positive', citing the series of reforms that the government has undertaken. Moody's had in January 2004 revised the rating on India to Baa3 from Ba1.
Here's what India Inc said about Moody's ratings upgrade:
Sunil Bharti Mittal, founder and chairman, Bharti Enterprises, said that the upgrade "underlines the efficacy of the bold structural reforms." "It clearly shows that the economy is turning the corner and poised for a big leap forward, highlighting the immense potential that India offers as a global investment destination. More importantly, it also emboldens the government to stay true to the path of strong and transformational reforms in the coming days," he added.
Terming the ratings upgrade by Moody's as a "positive measure", SBI (State Bank of India) chairman Rajnish Kumar said it will make foreign funds cheaper for both corporates as well as his bank. "The cost of foreign borrowings will automatically come down, which in itself is a big benefit for the country. In fact, always the question was why the rating upgrade wasn't happening," said Mr Kumar.
Nilesh Shah, managing director, Kotak Mahindra Mutual Fund, said that that Moody's upgrade is a "recognition for recent economic reforms in India'. "Moody's mood changes to upgrade India rating. Recognition for recent economic reforms in India & 5000 year track record of no default. Let's hope that poor standards also gets richer," Mr Shah said on Twitter.
However, there were some experts that differed.
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. Ratings changes are very slow, infrequent and at most times move with a lag to market expectations, he said.
"Markets should worry that the government now having received the ratings upgrade, may actually slacken and relax its commitment to reducing fiscal deficit, as per the stated plan - especially, at a time when investors seem to be worrying about the same as reflected in the increase in bond yields of more than 50 bps since August 2017,"said Chari.
Radhika Rao, an economist at DBS, felt that Moody's upgrade may not be seconded by other global agencies like Standard & Poor's and Fitch Ratings. "We don't think the other two global rating agencies - Fitch and S&P - will follow up in a hurry, based on their cautious rhetoric," she said, noting their concerns on "weak" state and central government finances.
Chokkaligam felt that the government may not compromise on the fiscal deficit but 'should put in more stimulus' in the economy.
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, had undermined growth in 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… real GDP growth will rise to 7.5% in 2018-19, with similarly robust levels of growth from 2019-20 onward,” it said.
“Longer term, India’s growth potential is significantly higher than most other Baa-rated sovereigns.”