Global credit rating agency Moody’sInvestor Service upgraded the Government of India’s local and foreign currencyissuer ratings by two notches, to Baa2 stable from Baa3 positive, citingcontinued progress in the nation’s economic and institutional reforms pushed bythe government, will help stabilize debts and enhance the growth potential ofthe country.Some have welcomed the upgrade as it waslong overdue, while others have questioned its timing — the economy beingroiled by slow growth, in the aftermath of the demonetization and transition toGST, saying that it has come too early.
But, as the dust settles, Moody’srating upgrade has set Indian markets abuzz and there are speculations aboutthe potential implications.What is it?Credit scoring and rating agencies rank aborrowing entity, whether a sovereign or a company, on their credit-worthiness.Different rating agencies have differentrating scales or terminology used to describe this credit-worthiness. InMoody’s rating, scale, bonds rated Baa3 and above are considered to beinvestment grade, meaning, these bonds are likely to meet the paymentobligations better.The last upgrade had happened way back in 2004, when Moody’s had upgraded India’s statusto Baa3, which is the lowest investment grade and just a notch above junkstatus. For the first time in 14 years, Indian companies are set to benefitfrom the rating upgrade as investors would be keen to lend to corporations domiciledin the country because of their better risk profile. According to the report put out by Moody’sInvestor Service, there were a few keytriggers for the ratings upgrade• the significant economic reforms such as demonetizationand promoting digitization, GST implementation and the frontal attack on bankNPAs will not only help strengthen India’s institutional framework but also helpsustainable growth and increase productivity.
• the government’s debt-to-GDP ratio at 68%is expected to remain stable once the economic and institutional reforms areundertaken 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 monetarypolicy through the MPC, the commitment ofthe FRBM and the GST Council, such changes in the macro-institutional framework are also likely to be positive forIndia and will promote transparency and fairness.• According to Moody’s the biggest triggerfor this upgrade was the government empowering theReserve Bank of India (RBI) to pushbanks to resolve banking NPAs via the deployment of recapitalization bonds. Interms of the implications, there are a few takeaways from this upgrade for now• Fund FlowsWith the foreign direct investment (FDI) atover $60 billion per annum, India is the largest recipient of FDI and couldfurther expediteSS1 the flows due to these ratingupgrade. In medium-term India’s growthprospects look promising and investors both domestic and international having asignificant interest in investing inIndia are likely to be even more enthusiastic.
• External Commercial Borrowing (ECB) could get cheaper Foreign portfolio Investors are likely toincrease their investments in companies domiciled in India as they become moreattractive in risk-adjusted terms. ECBs could get cheaper with the rate ofinterest as it is inversely related to the risk perception. India now would command a lower interest ratefor borrowing amount to make up the shortfall. Relative standing among its BRICS peersAfter the ratingupgrade, India now stands second and what’s interesting is that India hasupgraded in terms of ratings while some of its BRICS peers have downgraded. Thelowest among its peers is Brazil which stands at Ba2 while Russia is just anotch higher, at Ba1.
India has moved past South Africa as its rating hasdowngraded to Baa3 from Baa2 last year. Standing first in the pecking order isChina but its rating was downgraded to A1from Aa3 by Moody’s citing the economy was likely to erode over the yearscoming, with economy-wide debt continuing to increase, its potential growth isexpected to slow down. ConclusionThe irony of it was that after years Indiahas been classified as moderate credit risk, just a notch above the speculativegrade. 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 iscertainly a big acknowledgment of thereforms made by the Modi led government and, if taken ahead with the desiredmomentum has the potential of becoming Asia’s biggest economy, growing at arate of above 7% which is on par or slightly better than China.