In what can be taken as an endorsement of Prime Minister Narendra Modi's ongoing structural reforms and something that can boost investment sentiment, international rating agency Moody's Investor Services, on Friday, lifted India's sovereign rating by a notch to Baa2 from Baa3 after 13 years.
(Obligations rated Baa3 are subject to moderate credit risk. They are considered medium grade and may possess certain speculative characteristics. One notch higher than this is Baa2).
Moody's rating action sent the stocks, rupee and bonds blazing to new heights in early trades, only to recover and close with normal gains.
The rating agency said recent reforms had reduced India's risk of sharp rise in debt, "even in potential downside scenario".
"The decision to upgrade the ratings is underpinned by Moody's expectation that continued economic and institutional reforms will, over time, enhance India's high growth potential and its large and stable financing base for government debt, and will likely contribute to a gradual decline in the general government debt burden over the medium term," Moody's said in statement.
Finance Minister Arun Jaitley, who has been taking the flak for slowing economic growth and messy implementation of GST, said the jump in India's ranking in World Bank's ease of doing business by 42 places and Friday's rating upgrade vindicated the government's belief in their "reforms process".
"I am sure that many who had doubts in their minds about India's reforms process would now seriously introspect on their own position itself," he told the media in a hurriedly-called press conference after the Moody's announcement.
The global rating firm also backed the reforms undertaken the Modi government saying; "Moody's believes that those (reforms) implemented to date will advance the government's objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth. The reform program will thus complement the existing shock-absorbance capacity provided by India's strong growth potential and improving global competitiveness".
Moody's specifically mentioned GST and demonetization while applauding the various reforms undertaken by the government. It, however, feels there still a lot of work to be done on the fiscal front.
"On the fiscal front, efforts to improve transparency and accountability, including through adoption of a new Fiscal Responsibility and Budget Management (FRBM) Act, are expected to enhance India's fiscal policy framework and strengthen policy credibility," said the Moody's report.
Meanwhile, the markets cheered the latest development with BSE's Sensex and 50-share Nifty closing with a more than 50 basis points (bps) gains. Sensex raced up 414 points at one point but stabilised later to close 235.98 points, or 71 bps higher at 33,342.80. Nifty climbed up 68.85 points or 67 bps to end the day at 10,283.60.
The rupee saw its biggest gains in four years on Friday as it strengthened by 60 paise at 64.72 per dollar compared to its previous close of 65.32 per dollar.
Anis Chakravarty, lead economist, Deloitte India, said Moody's rating upgrade "can be expected to bring buoyancy in equity and debt markets. Coming on the back of significant improvement in the World Bank's ease of doing business index, this upgrade can also be expected to stimulate a more positive sentiment in the economy".
Ranen Banerjee, partner — public finance and economics, PwC India, saw the enhancement of India's rating as "global confidence on the ability and intent of the government to adhere to the fiscal consolidation roadmap of narrowing the fiscal deficit and paring the debt stock".
"In the event the Central Government is able to manage its finances well and stick to the fiscal consolidation roadmap in its Budget 2018-19, rating upgrades by other rating agencies should follow," said the PwC economist.
It will now be watched whether other major rating agencies such as Standards & Poor's (S&P) and Fitch Ratings will follow suit and raise their sovereign rating for India.
Highlights
- India’s sovereign credit rating upgraded by a notch to Baa2 from Baa3
- Outlook raised to stable from positive
- Is based on Moody’s expectation that continued economic and institutional refroms will enhance growth potential, which will gradually reduce government debt burden over medium term
- Reforms on land and labour yet to come to fruition
- Will induce positive sentiment among investors regarding India’s growth potential
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