Moody’s India credit rating upgrade: All you need to know

It was a huge shot in the arm for Modi-government yesterday, as global rating agency Moody’s Investors Service upgraded India’s local and foreign currency issuer ratings to Baa2 from Baa3 and changed the outlook on the rating to stable from positive. We take a look at five key takeaways from the development.

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Lenders are yet to accept the offer of taking 51 per cent stake in the company through a debt swap. (Reuters)

It was a huge shot in the arm for Modi-government yesterday, as global rating agency Moody’s Investors Service upgraded India’s local and foreign currency issuer ratings to Baa2 from Baa3 and changed the outlook on the rating to stable from positive. Many top experts and industrialists have hailed the incumbent government’s efforts regarding the transformational reforms undertaken by them. Chanda Kochhar, Managing Director and Chief Executive Officer, ICICI Bank said, “I think this is a very well deserved recognition of the structural reforms that have been undertaken by this government over the last couple of years. It is very heartening to note that Moody’s has taken cognisance of India’s higher growth potential, and the increased economic resilience as compared to the other countries in our ratings’ cohort.” In an interview to ET Now, Deepak Parekh, the veteran Chairman of HDFC said that the upgrade indicates that the seriousness of the government to carry through big transformational reforms has been noticed. Sunil Bharti Mittal, Founder and Chairman, Bharti Enterprises said, “The ratings upgrade underlines the efficacy of the bold structural reforms undertaken by the Government in recent years. 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.” With much happening, it might become difficult to understand what exactly has happened with regard to the Moody’s India credit rating upgrade. We take a look at five key takeaways from the development.

Rating upgraded to a notch above lowest investment grade

Moody’s has upgraded India’s local and foreign currency issuer ratings to Baa2, just a notch above the lowest investment grade of Baa3 earlier. This one-level shift from the lowest investment-grade ranking puts India in line with the Philippines and Italy. Further, the firm has changed its outlook on the country to stable from positive. There has also been a change in India’s short-term local currency rating to P-2 from P-3. The rating upgrade comes after a huge gap of 14 years.  What’s interesting to note here is that, in January 2004, when Moody’s had upgraded country’s rating it was the Atal Bihari Vajpayee government which was in power. Then, Moody’s said it was “reduction in external vulnerability, rising foreign investment, and vibrant economic growth” which led to an upgrade to Baa3.

Moody’s recognises India’s reforms

Moody’s has given a thumbs up to a slew of reforms from demonetisation, Aadhar-UID, GST and PSU bank recapitalisation. Moody’s says that GST will “promote productivity by removing barriers to interstate trade.” The global firm believes that “measures to address the overhang of nonperforming loans (NPLs) in the banking system,” will advance the government’s objective of improving the overall business climate. The global rating firm also credited government’s efforts in the Aadhaar system of biometric accounts and targeted delivery of benefits through the Direct Benefit Transfer (DBT) system which will lead to reduction of informality in the economy. “Moody’s believes that those (reforms) implemented to date 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,” said the firm in its report. Further, the firm points out that the implementation of the new indirect tax regime has undermined growth over the near term, adding that it expects real GDP growth to moderate to 6.7% in the fiscal year ending in March 2018 (FY2017).

India closes gap with China

While India, now at Baa2, is still behind China, its gap from the economic powerhouse of a neighbour has certainly shrunk to four notches. Notably, the gap between India and China had been reduced to five notches earlier this year when Moody’s cut China’s sovereign rating to A1 in May. However, this time India can boast of closing the gap on its own merit, and not because of the other party’s demerits.

Benefits from the rating

Many top notch economists and leading market voices say that the rating will lead to boosting India’s sentiments globally, leading to greater investment in the country, and reduction in cost of funds. Ace investor Rakesh Jhunjhunwala points out that this will give a big boost to India’s image globally, and improve the sentiments relating to ease of doing business in the country.  “Lot of pension funds globally which could earlier not invest in India due to their investment mandate will now invest in Indian debt and also equities,” said the investing icon. Uday Kotak,  Chairman Kotak Mahindra Bank Ltd said, “India is finally getting recognised in terms of being a stable economy and this is a long-term positive.”  The government will be able to reduce its cost of borrowing due to availability of funds,” Rakesh Jhunjhunwala pointed out in a conversation with CNBC TV18.

Warning label behind the upgrade

While the global rating firm has upgraded India’s rating, it has also said that a material deterioration in fiscal metrics and the outlook for general government fiscal consolidation would put negative pressure on the rating. “The rating could also face downward pressure if the health of the banking system deteriorated significantly or external vulnerability increased sharply,” noted Moody’s in its report.

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