Global describe this credit-worthiness. In Moody’s rating, scale, bonds

Global credit rating agency Moody’s
Investor Service upgraded the Government of India’s local and foreign currency
issuer ratings by two notches, to Baa2 stable from Baa3 positive, citing
continued progress in the nation’s economic and institutional reforms pushed by
the government, will help stabilize debts and enhance the growth potential of
the country.Some have welcomed the upgrade as it was
long overdue, while others have questioned its timing — the economy being
roiled by slow growth, in the aftermath of the demonetization and transition to
GST, saying that it has come too early. But, as the dust settles, Moody’s
rating upgrade has set Indian markets abuzz and there are speculations about
the potential implications.What is it?

Credit scoring and rating agencies rank a
borrowing entity, whether a sovereign or a company, on their credit-worthiness.
Different rating agencies have different
rating scales or terminology used to describe this credit-worthiness. In
Moody’s rating, scale, bonds rated Baa3 and above are considered to be
investment grade, meaning, these bonds are likely to meet the payment
obligations better.The last upgrade had happened way back in 2004, when Moody’s had upgraded India’s status
to Baa3, which is the lowest investment grade and just a notch above junk
status. For the first time in 14 years, Indian companies are set to benefit
from the rating upgrade as investors would be keen to lend to corporations domiciled
in the country because of their better risk profile. According to the report put out by Moody’s
Investor Service, there were a few key
triggers for the ratings upgrade• the significant economic reforms such as demonetization
and promoting digitization, GST implementation and the frontal attack on bank
NPAs will not only help strengthen India’s institutional framework but also help
sustainable growth and increase productivity.• the government’s debt-to-GDP ratio at 68%
is expected to remain stable once the economic and institutional reforms are
undertaken and growth to the economy comes back, this is critical because in Baa rating, the median debt-to-GDP ratio is at 44%.• the institutionalization of monetary
policy through the MPC, the commitment of
the FRBM and the GST Council, such changes in the macro-institutional framework are also likely to be positive for
India and will promote transparency and fairness.• According to Moody’s the biggest trigger
for this upgrade was the government empowering the
Reserve Bank of India (RBI) to push
banks to resolve banking NPAs via the deployment of recapitalization bonds.
terms of the implications, there are a few takeaways from this upgrade for now• Fund FlowsWith the foreign direct investment (FDI) at
over $60 billion per annum, India is the largest recipient of FDI and could
further expedite
SS1 the flows due to these rating
upgrade. In medium-term India’s growth
prospects look promising and investors both domestic and international having a
significant interest in investing in
India are likely to be even more enthusiastic.• External Commercial Borrowing (ECB) could get cheaper Foreign portfolio Investors are likely to
increase their investments in companies domiciled in India as they become more
attractive in risk-adjusted terms. ECBs could get cheaper with the rate of
interest as it is inversely related to the risk perception. India now would command a lower interest rate
for borrowing amount to make up the shortfall. Relative standing among its BRICS peersAfter the rating
upgrade, India now stands second and what’s interesting is that India has
upgraded in terms of ratings while some of its BRICS peers have downgraded. The
lowest among its peers is Brazil which stands at Ba2 while Russia is just a
notch higher, at Ba1. India has moved past South Africa as its rating has
downgraded to Baa3 from Baa2 last year. Standing first in the pecking order is
China but its rating was downgraded to A1
from Aa3 by Moody’s citing the economy was likely to erode over the years
coming, with economy-wide debt continuing to increase, its potential growth is
expected to slow down.     ConclusionThe irony of it was that after years India
has been classified as moderate credit risk, just a notch above the speculative
grade. It certainly did a little justice to an economy that boasts of a GDP of
$2.2 trillion and a market cap of $2.6 trillion. The rating upgrade is
certainly a big acknowledgment of the
reforms made by the Modi led government and, if taken ahead with the desired
momentum has the potential of becoming Asia’s biggest economy, growing at a
rate of above 7% which is on par or slightly better than China.

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