Moody’s: Recent policy changes,RBI steps to help rating profile

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Mumbai | October 30, 2014 5:31 PM

Rating agency Moody's today said the recent reform measures by the government....

Rating agency Moody's today said the recent reform measures by the government coupled with those unveiled by the Reserve Bank. (Reuters)Rating agency Moody’s today said the recent reform measures by the government coupled with those unveiled by the Reserve Bank. (Reuters)

Rating agency Moody’s today said the recent reform measures by the government coupled with those unveiled by the Reserve Bank on the economic, fiscal and financial fronts, are credit positive as they will accelerate growth if successfully implemented.
Pointing out that these recent measures are incremental rather than radical, Moody’s said, these steps will sustain higher GDP growth and address some of the constraints on the country’s sovereign credit profile.
In a report released from Singapore this afternoon, titled ‘Recent policy changes to support growth acceleration,’ Moody’s Investors Service lauded the ‘Make in India’ campaign which saw the government initiating some reforms in the labour and investment policies front.
The report also appreciated the financial inclusion measures, infrastructure development initiatives, clarity around inflation targets, as well as banking and energy sector reforms are all measures in the direct direction.
The report further notes that together these measures will harness the country’s economic advantages of size, diversity and a deep pool of labour and savings.
“These measures will also improve its investment climate, and allow the economy to reap the benefits of lower global commodity prices and international financial flows seeking real investment assets,” the report said.
Based on evidences from other countries and India’s own experience in the past decade, Moody’s said it expects incremental reforms to raise productivity, savings and investment growth.
In addition, if policies lower fiscal deficits, stabilise inflation and strengthen the banking sector, they will mitigate the macroeconomic and financial risks to growth that have been evident in the last three years.
These policies can lead to higher investment and lower macroeconomic imbalances which in turn will help sustain higher growth rates of around 7.5 percent over the next 5-10 years, Moody’s said.
However, it ruled out any revision in the credit rating saying the present country’s sovereign rating of BBB- with a stable outlook already incorporates Moody’s assessment that its growth potential is high, such higher growth rates would, in themselves, be of limited, though positive, significance for the sovereign credit profile.
“Still, the effective implementation of all the new policies could have further positive sovereign credit implications, if they demonstrate rising institutional strength or lower vulnerability to event risk,” said the report.
“Moody’s would revisit its assessment of the country’s institutional strength if inflation metrics, investment climate, policy predictability and transparency are to show sustained improvement. Stronger fiscal, balance of payments, and banking sector metrics will lower the country’s vulnerability to event risk.
“However, given the early days and the incremental nature of policy changes, we expect it will take several quarters for an improvement in quantitative and qualitative credit metrics to crystallise,” the report concluded.

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