Moody’s Investors Service has upgraded India’s sovereign rating for the first time since 2004, citing continued progress in the nation’s economic and institutional reforms. The rating agency on Monday moved India's rating up by one notch to Baa2 from Baa3. The outlook on the rating is 'stable'.
Explaining the rationale behind the upgrade, Moody’s said reforms being pushed by the government will help stabilize debt and enhance the country’s growth potential.
The decision to upgrade the ratings is underpinned by Moody’s expectation that continued progress on 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 Investors Service
Prime Minister Narendra Modi’s government has rolled out a string of reforms such as the Goods and Services Tax, a new monetary policy framework, measures to check the banking sector’s bad loans ratios, demonetisation, the widely debated Aadhaar biometric system, and the Direct Benefit Transfer system. These reforms will reduce informality in the country, Moody’s report said. The rating agency noted that the recently introduced GST will promote productivity by removing barriers to interstate trade.
Most of the reforms implemented by the government have been met with debates, especially GST, demonetisation and Aadhaar. The first two have led to short-term disruptions in the economy with the growth slowing to its lowest in three years. Moody’s acknowledged the short-term weakness in the economy, stating that it expects real GDP growth to moderate to 6.7 percent in the fiscal year ending in March 2018.
However, as disruption fades, India’s GDP growth will rise to 7.5 percent, Moody’s said.
‘Relief To All’
Bond markets have recently suffered due to uncertainty on fiscal front, which “ironically” came with the implementation of reforms like GST, said Vivek Rajpal, senior rates strategist at Nomura. The upgrade however, should be seen as "a relief to all classes" and will ensure that investors see upcoming reforms in positive light, Rajpal said.
India’s benchmark Nifty index hit a record high on open. At 9:30 a.m., the index was trading at 10,324, up 1 percent. The rupee also strengthened by over a percent while the 10-year bond yield slipped almost 10 basis points to 6.95 percent.
Rating Upgrade ‘Overdue’
Reacting to Moody’s decision to upgrade India’s sovereign rating, Chief Economic Adviser Arvind Subramanian told BloombergQuint that this is an “overdue correction.” The 2017 Economic Survey released in January, authored by Subramanian, had questioned the variables being used by rating agencies in assessing the Indian economy. Subramanian had argued that India deserved to be in a higher rating category.
“It (rating upgrade) is a recognition of the reforms that has been undertaken including the GST and other measures,” Subramanian told BloombergQuint while adding that GST, in particular, will be a source of fiscal stability going forward.
Finance Secretary Hasmukh Adhia said the upgrade is a vindication of the government’s chosen path of reforms.
“The path that Government has chosen for long term reforms and fiscal consolidation is well recognised by investors already.... The rating agency too has now confirmed it formally, which is welcome,” Adhia said via his Twitter account.
Bimal Jalan To BQ
The ratings upgrade is “extremely positive” news for the country and will further bolster confidence in the economy, former RBI Governor Bimal Jalan told BloombergQuint in a phone interview.
Reforms such as the GST and the public sector bank recapitalisation will begin to show its constructive side on ground in another six months to one year once the initial disruptions die down, Jalan said.