Moody’s upgrades India’s ratings to Baa2

Context 

• Moody’s has today upgraded the Government of India’s local and foreign currency issuer ratings to Baa2 from Baa3 and changed the outlook on the rating to stable from positive.
• Moody’s has also upgraded India’s local currency senior unsecured rating to Baa2 from Baa3 and its short-term local currency rating to P-2 from P-3

What happened?

• Moody’s has also raised India’s long-term foreign-currency bond ceiling to Baa1 from Baa2, and the long-term foreign-currency bank deposit ceiling to Baa2 from Baa3.
• The short-term foreign-currency bond ceiling remains unchanged at P-2, and the short-term foreign-currency bank deposit ceiling has been raised to P-2 from P-3.
• The long-term local currency deposit and bond ceilings remain unchanged at A1.
• Moody’s separately raised the ratings of top Indian lender State Bank of India, HDFC Bank as well as state-run energy firms, NTPC, NHPC, GAIL India Limited and the National Highways Authority of India, potentially lowering their borrowing costs.

What is Moody’s?

• Moody’s is an essential component of the global capital markets, providing credit ratings, research, tools and analysis that contribute to transparent and integrated financial markets.

What is credit rating?

• An assessment of the creditworthinessof a borrower in general terms or with respect to a particular debt or financial obligation.
• A creditrating can be assigned to any entity that seeks to borrow money – an individual, corporation, state or provincial authority, or sovereign government.
• Credit assessment and evaluation for companies and governments is generally done by a credit rating agency such as Standard & Poor’s or Moody’s

What could move the ratings up?

• The rating could face upward pressure if there were to be a material strengthening in fiscal metrics, combined with a strong and durable recovery of the investment cycle, probably supported by significant economic and institutional reforms.
• Greater expectation of a sizeable and sustained reduction in the general government debt burden, through increased government revenues combined with a reduction in expenditures, would put positive pressure on the rating.
• Implementation of key pending reforms, including land and labor reforms, could put additional upward pressure on the rating.

What could move the ratings down?

• A material deterioration in fiscal metrics and the outlook for general government fiscal consolidation would put negative pressure on the rating.
• The rating could also face downward pressure if the health of the banking system deteriorated significantly or external vulnerability increased sharply.

How was India’s sovereign rating in the past?

• Moody’s Investors Service raised India’s sovereign rating for the first time since 2004, overlooking a haze of short-term economic uncertainties to bet on the nation’s prospects from a raft of policy changes by Prime Minister Narendra Modi.
• That’s a one-level shift from the lowest investment-grade ranking and puts India in line with the Philippines and Italy.
• The World Bank has acknowledged it’s getting easier to do business in India, with Asia’s third-largest economy jumping 30 places to rank 100th in the latest ranking released last month.

What are the factors influencing the ratings?

• Moody’s cited the goods and services tax, which it said will promote productivity by removing barriers to interstate trade, improvements to the monetary policy framework, measures to clean up non-performing loans, and efforts to bring more areas into the formal economy.
• Efforts to cut red tape and the imposition of a new consumption tax — have met with mixed success.

What is the significance of India’s performance?

• Moody’s believes that those 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

What is the way ahead?

• Moody’s noted that while a number of key reforms remain at the design phase, it believes those already implemented will advance the government’s objective of improving the business climate, enhancing productivity and stimulating investment.
• The recent reforms offer greater confidence that the high level of public indebtedness which is India’s principal credit weakness will remain stable, even in the event of shocks, and will ultimately decline.