Moody's says India 'positive' under Modi but still below investment grade

Rating agency Moody's today changed India's outlook to positive from stable, saying that the government is taking steps to improve economic strength and stressed that a rating upgrade could follow in about 12-18 months times.

"Moody's decision to revise the ratings outlook to positive from stable is based on its view that there is an increasing probability that actions by policy makers will enhance the country's economic strength and, in turn, the sovereign's financial strength over coming years," the US-based agency said in a statement.

Moody's has a 'Baa3' rating on India, which stands for below investment grade.

"The ability of policymakers to strengthen India's sovereign credit profile to a level consistent with a higher rating will become apparent over the next 12-18 months," Moody's said.

It said favourable demographics, economic diversity, as well as high savings and investment rates would act as structural advantage for India. Besides, relatively benign global commodity prices and liquidity conditions, will keep India's growth higher, Moody's Investors Service said.

"Moody's India upgrade validates: government reform thrust, better growth, macro outlook, budget strategy of public investment, fiscal discipline," Chief Economic Advisor Arvind Subramanian tweeted.

The rating agency, however, said that recurrent inflationary pressures, occasional balance of payments pressures, and an uncertain regulatory environment have led to volatility in growth and exposed India to financial shocks, thereby constraining its credit profile.

"The recent measures to address inflation, keep external balances in check, simplify the regulatory regime for investors, increase foreign direct investment, and facilitate infrastructure development will reduce some of India's sovereign credit constraints," it said.

Giving rationale for affirming 'Baa3' rating, Moody's said it reflects India's weaker performance on fiscal, inflation and infrastructure-related metrics. "While policies are beginning to address each of these factors, the extent of likely improvements is as yet unclear."

The weak asset quality of banking system poses sovereign credit risks because of the banking sector's role in financing growth, it said, adding that in the absence of any improvement in banking-system metrics over the coming months, India's sovereign credit profile will remain constrained.

"Sovereign credit improvements over the next 12-18 months will depend on the extent to which growth, policies and buffers can contain the risks associated with rising leverage," Moody's said.

It said that if the policymakers are successful in their efforts to introduce growth-enhancing and growth-stabilising economic and institutional reforms would lead to the rating being considered for an upgrade.

"On the other hand, the rating outlook would be revised to stable if economic, fiscal and institutional strengthening appeared unlikely, or banking system metrics remained weak or balance of payments risks rose," Moody's added.

In the 2015-16 Budget presented on February 28, Finance Minister Arun Jaitley had rolled out a new fiscal consolidation roadmap under which the fiscal deficit will be brought down to 3.9 per cent of GDP in 2015-16, and then further to 3.6 per cent and finally to 3 per cent in 2016-17 and 2017-18.

Jaitley said the economic growth will be over 8 per cent next fiscal and double digit growth rate is feasible soon. Hence, he decided to delay to fiscal consolidation programme by a year to put in more funds in the economy to bolster growth.