Moody's affirms India's ratings with a positive outlook

However, says Indian banking system's asset quality, loan loss coverage and capital ratios remain weak

Moody's Investors Service today affirmed India's sovereign rating at 'Baa3' with a positive outlook, saying it expects policymakers to continue reforms to achieve balanced growth and reduce the government's debt load.

India had pitched hard with Moody's for a rating upgrade, but the US-based agency has maintained that it would wait for "tangible" benefits of reform initiatives before upgrading its sovereign rating.

"The policy effort has not delivered a sufficiently clear prospect of the reform dividends -- sustained, high growth and the promise of a reduction in the country's debt burden -- to support an upgrade," Moody's said as it affirmed India's 'Baa3' ratings while maintaining a 'positive' outlook.

The positive outlook denotes Moody's expectation that, over time, India's credit metrics will likely shift to levels consistent with a 'Baa2' rating.

"In particular, the outlook reflects our expectation that continued policy reform implementation will allow balanced growth to support a reduction in the government debt burden, currently a constraint on India's rating," it said.

Baa3 rating implies lowest investment grade -- just a notch above 'junk' status.

A broad range of policies have been implemented that are conducive to moderating inflation and limited current account deficits. A number of policy reforms, if effective, would lead to higher investment and more efficient savings, Moody's said.

The passage and ongoing implementation of a range of economic reform measures, including the goods and services tax and reform of the bankruptcy code, points to improvements in government effectiveness, it added.

"Policy reforms are still relatively recent with material uncertainty about the effectiveness of measures already implemented and whether momentum will sustain," Moody's said.

However, private investment has not picked up in response to the government's measures, denoting limited policy effectiveness.

Its assessment is investment has been constrained by high leverage in some sectors, a relatively unfavourable global environment and in some cases, limited access to finance. Businesses may have to wait for more certainty about the tangible implications of reforms on their operating environment.

The coordination and alignment of objectives between different parts of the government and the private sector poses implementation challenges, it added.

The sovereign rating and outlook for a country are often referred to as key parameters by foreign investors and global bodies to gauge its investment climate.

The banking sector, Moody's said, however continues to pose "material contingent liability risks to the sovereign".