Moody’s Investors Service on Tuesday said India’s rating could be upgraded if expectations of gradual but credit-positive reforms are realised in actual policy implementation and if the recent improvement in inflation and also the fiscal and current account ratios is sustained.
However, it cautioned that the rating outlook would likely return to “stable” (from “positive”) if there is a reversal of the policy reform process; that is, if the banking system metrics continue to weaken; or, if there is a decline in foreign exchange reserves coverage of external debt and imports.
The Narendra Modi government has made some progress on reforms to improve the operating environment and ease investment procedures. However, progress has stalled in two key areas: passing a unified Goods and Services Tax and the Land Acquisition Act due to political gridlock.
Moody’s has a ‘Baa3’ rating with positive outlook on government bond for India which incorporates the strong growth potential of the country’s economy as well as the government’s high fiscal deficits and regulatory and infrastructure constraints on competitiveness. ‘Baa3’ is considered investment grade. “The positive outlook on the rating reflects Moody’s view that recent and proposed policies will stabilize inflation, improve the regulatory environment, increase infrastructure investment and lower government debt ratios,” Moody’s said in a report.
Moody’s report is an annual update to the market, and does not constitute a rating action. According to the rating agency, policy progress is likely to be slow and unlikely to be reflected in near term economic indicators.
However, India’s sovereign credit profile would improve over the medium term if policies to improve the country’s operating environment are effectively implemented, and accompanied by a strengthening of institutions, it said.The report pointed out that India’s macro- economic indicators have improved over the last few years. The general government deficit and government debt to GDP ratio are both lower than their levels in 2009 while inflation and the current account deficit-to-GDP ratio have also declined from their recent peaks.Noting that lower oil prices. tighter fiscal and monetary policies have also helped restore India’s macro-economic balance over the last two years, Moody’s highlights that this improved balance offers the Indian economy and financial system some resilience to potential volatility in global capital flows in coming months.
Although it has slowed from peaks achieved a decade ago, India’s GDP growth – which Moody’s forecasts at 7% for FY16 – is likely to surpass the average for its peers, as it has over the last decade. As a commodity importer, India would benefit from a low commodity price environment, and its reliance on domestic demand for GDP growth shields the economy somewhat from the subdued outlook for global growth.
On Monday, Prime Minister Modi reviewed the situation after a Chinese stock market crash plunged the Indian equities the most since 2009. Finance Minister Arun Jaitly said the government would hold consultations with all stakeholders including the Reserve Bank of India before taking new measures to further strengthen the economy. Jaitley reiterated that India’ economy would grow by 8-8.5% in FY16 as the country’s fundamentals are strong and public investment was being being stepped up.
# India’s rating could be upgraded if credit positive reforms are realized
# The rating outlook would return to stable if there is reversal of reforms
# The positive outlook on India’s rating reflects policies will stabilize inflation, improve regulatory environment, increase infrastructure investment and lower government debt ratios
# India’s sovereign credit profile would improve over the medium term if policies to improve India’s operating environment are effectively implemented