Investors in the rupee-denominated Government of India bonds can be more confident of their investments as Moody's has upgraded its outlook on these instruments from stable to positive on the back of strong economic recovery.
However, the global credit rating agency has kept the rating on these bonds unchanged at Ba2, which is a non-investment grade.
"The change in the outlook on the local currency government bond rating was prompted by increasing evidence that the Indian economy has demonstrated its resilience to the global crisis and is expected to resume a high growth path with its underlying credit metrics relatively intact," Moody's sovereign analyst for India Aninda Mitra said here today.
Meanwhile, Moody's raised the rating on the domestic banks' foreign currency deposits by one notch to Ba1 from Ba2 in the non-investment category to better reflect the robust external position of the country.
It, however, kept foreign currency denominated Government bonds ratings at two notches higher at Baa3 than the rupee -denominated bonds. Baa3 is an investment grade rating.
The agency said it is not changing the outlook on the foreign currency denominated government bonds ratings. However, there could be narrowing of the gap between the rupee-denominated and a foreign currency-denominated rating of the government bonds, Moody's said.
Mitra said, "Moody's has long held the view that the exceptional strength of India's external position was such that holding a foreign currency government debt instrument was less risky than holding a local currency government debt instrument. We are reconsidering now whether a two-notch rating gap is appropriate."
Amidst a trying global environment, relative stability in the government's debt trajectory, coupled with the high level of debt finance ability, suggests that narrowing of the gap should rather come from an upgrade of the local currency bond rating, Moody's said.
"The structure of the Indian economy is robust, and cyclical trends are strong and sustainable," Moody's said in its report, however adding that fiscal credibility of the Government is a drawback, but its attendant risks are being contained by the economy's high growth and resilience.