Thursday, 14 December, 2017

Moody's gives Modi a boost by raising India's sovereign bond rating

Image for representation only Image for representation only
Kelvin Reese | 19 November, 2017, 02:29

"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", a Moody's Investor Service release said.

U.S. credit rating agency Moody's on Friday upgraded India's sovereign rating to Baa2 from its lowest investment grade of Baa, while changing the outlook for the country's rating to stable from positive, and said its was based on the Indian government's "wide-ranging programme of economic and institutional reforms".

Reacting to the ratings upgrade, finance minister Arun Jaitley said, "Many who had doubts in their minds about India's reform process would need to now seriously introspect on their thinking".

The rating upgrade comes after a gap of nearly 14 years, which many economists said was long overdue.

BSE index jumped by 235.98 points after this news came out; while Nifty closed 68.85 points up.

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The agency said it was lifting India's rating to Baa2 from Baa3 and changed its rating outlook to stable from positive as risks to India's credit profile were broadly balanced. The markets cheered the move. "While a number of reforms remain at the design phase, Moody's believes that those implemented to date will advance the government's objective of improving business climate, enhancing productivity, stimulating investment, and ultimately fostering strong and sustainable growth", it added. Rupee surged as much as 1.1%.

The upgrade also comes just weeks after India improved its ranking by 30 places to 100th for the first time in the World Bank's ease of doing business report. Whether or not it prompts an upgrade by rating agencies should be a secondary consideration. Standard and Poor's, which still assigns the lowest investment grade to India with a stable outlook, said India needed to address its weak fiscal position, indicating upgrades would take time.

Even if recent economic reforms have seen near-term negative growth impacts, there have been some benefits.

Moody's also expected the real GDP growth to moderate to 6.7% in the fiscal year ending in March 2018. The measures should contribute to further strengthening of India's institutions, it said.

Ranen Banerjee, partner - public finance and economics, PwC India, saw the enhancement of India's rating as "global confidence on the ability and intent of the government to adhere to the fiscal consolidation roadmap of narrowing the fiscal deficit and paring the debt stock". Earlier, the outlook was positive but on a lower rating, which indicated there were more chances of an upgrade than downgrade.

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