In recognition of a policy “framework” put in place by the Narendra Modi government that could “enhance the country’s economic strength”, Moody’s on Thursday raised India’s credit rating outlook to ‘positive’ from stable, while retaining its lowest investment grade rating (Baa3) for the nation.
However, Fitch Ratings chose to retain its rating for India on the same day at ‘BBB-’, corresponding to Moody’s, without changing the stable outlook assigned in April 2014, citing “limited improvement” in the country’s fiscal position.
Chief economic advisor Arvind Subramanian said it confirms the fact that growth and other macro-economic prospects of the country are improving. He said, “It also kind of validates the strategy that the government and the Budget were successful in being able to push for public investment and growth without compromising the commitment of fiscal discipline.”
Moody’s would consider a rating upgrade for India over the next 12-18 months if policy makers were successful in their “efforts to introduce growth-enhancing and growth stabilising economic and institutional reforms”. However, it warned of a rating downgrade if “economic, fiscal and institutional strengthening appeared unlikely, or banking system metrics remained weak or balance of payments risks rose”.
“We hope there will be an investment grade upgrade, but that is not what will drive policy going forward,” Subramanian said.
Standard & Poor’s, the biggest rating agency, is yet to come up with its report since September 2014, when it had retained the country’s sovereign rating at BBB-, but redefined the outlook to “stable.” Fitch Ratings has had a ‘stable’ outlook for the country’s credit rating (again, BBB-) since 2013.
Moody’s also revised up the outlook to positive of 12 state-run banks, including SBI and PNB, and also that of private lenders such as ICICI Bank and HDFC Bank. It has upgraded outlook to positive for IOC, BPCL and NTPC as well, but kept the outlook unchanged at stable for ONGC, Oil India and GAIL (India).
Moody’s rating outlook upgrade for India was based on the view that the country’s policy makers are establishing a framework that will likely allow its growth to continue to outperform its peers in the medium term and improve its macro-economic, infrastructure and institutional profile.
“Recent measures to address inflation, keep external balances in check, simplify the regulatory regime for investors, increase foreign direct investment, and to facilitate infrastructure development will reduce some of India’s sovereign credit constraints,” the rating agency said.
Indeed, the Modi government has taken a number of steps to catalyse an incipient investment cycle to enable the economy to grow faster, but on the ground things are at best beginning to become visible.
The government expects economic expansion to touch 7.4% in FY15, compared with 6.9% a year before, and projects the growth to be in the range of 8-8.5% for FY16. It also expects the forecast of normal monsoon to help anchor retail inflation at 5-5.5% by the end of March 2016.
The CEA said the recent increase in food prices due to unseasonal rains was a ‘blip’, which would subside later.