Moody's improves India's rating

17 Nov '17

2 min read

Moody's Investors Service has upgraded the Indian Government’s local and foreign currency issuer ratings to Baa2 from Baa3, its lowest grade, and changed the outlook on that to stable from positive, attributing the raise to a “wide-ranging program of economic and institutional reforms”. This implies reduction in capital costs and more foreign investment.

The company 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, according to a Moody’s press release. The last upgrade had occurred in 2004, when India's status was marked Baa3.

Moody's expects that continued reforms will gradually 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.

It believes that the reforms have reduced the risk of a sharp increase in debt, even in potential downside scenarios and 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. Reforms will complement the existing shock-absorbance capacity offered by India's strong growth potential and improving global competitiveness.

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.

However, the government's debt is a cause for concern, with the debt to GDP ratio at 68 per cent in 2016 against a comfort level of 44 per cent in this particular rating category, Moody’s observed. This could severely hamper the government's ability to take any more debt for infrastructure projects, relying instead on issuing bonds, which may find greater acceptability due to the ratings upgrade.

Most reform measures will take time for show impact, and some, such as the goods and services tax and demonetization, have undermined growth over the near term. Moody's expects real GDP growth to moderate to 6.7 per cent in fiscal 2017-18 and rise to 7.5 per cent in the next fiscal.

In the long term, India's growth potential is significantly higher than most other Baa-rated nations, Moody’s added. (DS)

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