The Big Picture – Moody’s upgrades India’s Rating

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The Big Picture – Moody’s upgrades India’s Rating


Global credit rating agency Moody’s investor services has increased for the first time since 2004 India’s sovereign rating, overlooking a haze of economic uncertainties to bet on the nation’s prospects from a set of policy changes by PM Modi.  It cited country’s high growth potentials in the years to come due to recent economic and institutional reforms.

Analysis:

  • Moody’s has upgraded the GOI’s rating as local and foreign currency issuer from Baa3 (with a positive outlook) to Baa2 (with a stable outlook). This is an upgrade from previous lowest credit rating to a rating with moderate credit risk of medium grade.
  • This has happened as a consequence of recent rise of India in World Bank’s Ease of Business Index from 130 (in 2017) to 100 (in 2018). Higher ranking in this index implies simpler regulations for businesses and stronger protection of property rights.
  • It is a good sign that an upgrade has happened finally in Moody’s rating for India, though it is delayed. The complexities of a large economy functioning in a democratic set up and Moody’s as well as other ratings company like Standards and Poors were probably not appreciating federal democracy at top of it.
  • Similar to a person applying for a bank loan with good credit profile, good Moody’s ratings make it cheaper for Indian companies to raise a loan from abroad. It reduces the interest cost regime (viz. cost of capital gets cheaper), which is helpful for entrepreneurs as well.
  • Many recent government reforms like GST, Insolvency Act being put into action and announcement of bank recapitalization (which increases bank’s ability to lend) have taken place. This gives a sense of support to foreign investors that a code is present and it is being implemented by the government.
  • But credit rating companies are also worried about fiscal deficit of the country, which is still high in India. This may have prevented them from putting India in even higher grade.
  • There is also the issue of uncertainty in private sector investments. Question arises how much to rely on government’s incentives and expenditures like Sagarmala Project. It may have some positive things like creation of more jobs, but fiscal deficit of the nation needs to be looked at.
  • Rating agencies look at long-term stability of policies. Impact on employment and other issues come with it later. These ratings do not look at short term uncertainties which are part of discussions for a common voter in an upcoming election
  • Rating agencies see how quickly the government can correct any shock or depressions. Moody’s is looking as a positive signal for the path which has been set for growth and development
  • As an impact of this upgrade, market also reacted positively showing a boost in SENSEX and NIFTY as well as appreciation in rupee. This shows a boost of confidence in the market.

Conclusion:

Thus, there is an expectation of gradual decline in the general government debt burden due to recent government reforms. Moody’s ranking gives a hope that government’s objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment & ultimately fostering strong and sustainable growth will be advanced.