For the first time in 14 years, Moody’s Investors Services upgraded the sovereign rating of India. It mentioned that the country was poised for fast growth due to the economic and institutional reforms by the Prime Minister Narendra Modi’s government.
The agency, based in the US lifted the country’s ratings on sovereign bonds to Baa2 from the lowest investment grade of Baa3. Further, it also changed the outlook for the rating from positive to stable. The credit ratings are seen as a barometer of a country’s credit profile as well as the regulatory climate. If the country has a favorable rating, it will help the government and companies raise capital in the global financial market. In addition, it has been noted that institutional investors also rely on the ratings for an indication of the country’s socio and political environment before they make an investment decision.
The upgrade in rating is seen as an endorsement of the bold economic decisions made by the Prime Minister Modi which include the rollout of Goods and Services Tax which introduced a single tax system in the market. The news will help the BJP led government tackle the narrative around the economy which is growing at the slowest pace in three years, as it heads into elections in the coming months. All markets rely on this upgrade.
The agency had downgraded China in May and also cut the Asian giant’s sovereign rating. Moody’s also warned that India’s rating could be downgraded if the management of government finances remained inefficient. The other significant rating agencies-Fitch ratings and Standard and Poor’s have assigned India the lowest investment grade with a stable outlook. This upgrade is underpinned by an expectation that continued progress will enhance the growth potential of the country. India’s high debt burden remains a constraint on the profile of the country; Moody’s believes that the reforms put in place have brought down the sharp increase in debt.
The rating upgrade is positive for bonds, although it might not translate into large inflows with most foreign investors already investing in the bond market inflows limited by quotas. The agency also acknowledged the improvements in the monetary policy framework and the measures such as Aadhaar system and targeted delivery of benefits. However, the agency mentioned that most measures will take time for their impact to be seen and some will only be seen in the long term. It expects a real GDP growth to 6.7% in the financial year ending March 2018. In the long term, India’s growth potential is expected to be significantly higher than many other Baa-rated sovereigns.