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Moody’s backs Narendra Modi’s policies, lifts India’s rating after 14 years

Moody’s rating upgrade is seen as an endorsement of a range of bold economic decisions made by PM Narendra Modi, including the rollout of GST.

business Updated: Nov 17, 2017 23:58 IST
Asit Ranjan Mishra
File photo of Prime Minister Narendra Modi addressing a gathering in Ahmedabad. The good news will help the ruling BJP-led government tackle the narrative around the economy, which is growing at its slowest in three years, as it heads into a series of elections over the coming months.
File photo of Prime Minister Narendra Modi addressing a gathering in Ahmedabad. The good news will help the ruling BJP-led government tackle the narrative around the economy, which is growing at its slowest in three years, as it heads into a series of elections over the coming months.(Reuters)

Moody’s Investors Services upgraded India’s sovereign rating for the first time in nearly 14 years on Friday, saying the country was poised for fast growth because of wide-ranging economic and institutional reforms by Prime Minister Narendra Modi’s government.

The US-based agency lifted ratings on India’s sovereign bonds to Baa2 from its lowest investment grade of Baa3, and also changed the outlook for the country’s rating to stable from positive.

Sovereign credit ratings are a barometer of a country’s credit profile and regulatory climate. A favourable rating helps governments and companies raise capital in global financial markets. Also, institutional investors rely on ratings for an indication of a country’s socio-political environment before making investment decisions.

The rating upgrade is seen as an endorsement of a range of bold economic decision made by Prime Minister Modi, including the rollout of a landmark Goods and Services Tax that forged India into a unified market. It comes just weeks after the World Bank moved India up 30 places in its annual ease of doing business rankings.

The good news will help the ruling BJP-led government tackle the narrative around the economy, which is growing at its slowest in three years, as it heads into a series of elections over the coming months. All markets including stocks, bonds and rupee rallied on the upgrade.

“We believe that it is a belated recognition of all the positive steps which have been taken in India in the last few years, which has contributed to strengthening of Indian economy,” finance minister Arun Jaitley told a press conference.  

“Many who had doubts about India’s reform process would now seriously introspect on their position.”

Shortly after the announcement, Modi led a chorus of ministers and policymakers who tweeted their reaction to the upgrade.

“Moody’s believes that the @narendramodi government’s reforms will improve business climate, enhance productivity, stimulate foreign and domestic investment, and ultimately foster strong and sustainable growth,” Modi tweeted.

Moody’s downgraded China in May, followed by Standard and Poor’s (S&P) which also cut the Asian giant’s sovereign rating.

But Moody’s warned that India’s rating could be downgraded if the management of government finances slipped.

“The rating could also face downward pressure if the health of the banking system deteriorated significantly or external vulnerability increased sharply,” it said.

The other two key global rating agencies—Standard and Poor’s and Fitch Ratings—have assigned India the lowest investment grade rating with stable outlook.

“The decision to upgrade the ratings is underpinned by Moody’s expectation that continued progress on economic and institutional reforms will, over time, enhance India’s high growth potential…,” Moody’s said about India, hoping to see a gradual decline in government debts over the medium term.

“In the meantime, while India’s high debt burden remains a constraint on the country’s credit profile, Moody’s believes that the reforms put in place have reduced the risk of a sharp increase in debt, even in potential downside scenarios.”

Credit Suisse in a statement said the rating upgrade for India is positive for bonds, especially for near term sentiment which has been weak.

“But it might not translate into large inflows with most foreign investors already actively investing in India and bond market inflows limited by quotas,” it added.

Among other things, Moody’s acknowledged improvements to the monetary policy framework; measures to address the overhang of non-performing loans (NPLs) in the banking system; and measures such as demonetisation, the Aadhaar system of biometric accounts and targeted delivery of benefits through the Direct Benefit Transfer (DBT) system.

“Other important measures which have yet to reach fruition include planned land and labor market reforms, which rely to a great extent on cooperation with and between the States,” it said.

However the rating agency maintained that most of these measures will take time for their impact to be seen, and some, such as the GST and demonetisation, had undermined growth in the near term.

Moody’s expects real GDP growth to moderate to 6.7% in the fiscal year ending in March 2018.

“However, as disruption fades… real GDP growth will rise to 7.5% in 2018-19, with similarly robust levels of growth from 2019-20 onward,” it said.

“Longer term, India’s growth potential is significantly higher than most other Baa-rated sovereigns.”