Moody's upgrades India's rating; backs reforms like demonetisation, GST

The rating agency has also changed its outlook on India rating from positive to stable, a move that will help India attract more foreign fund flows and corporates tap debt at lower rates abroad

Moody's Investors Services on Friday upgraded India’s sovereign ratings from the lowest investment grade to a notch higher, in a vote of confidence in the Narendra Modi-led central government’s decisions on demonetisation, introduction of the goods and services tax (GST) and measures to resolve banks’ bad asset issue, among other reforms.

Also, in a move that will help India in attracting more foreign fund flows and corporates in tapping debt at lower rates abroad, the agency changed its outlook on India’s rating to stable from positive.

In technical terms, the government's local and foreign currency issuer ratings have been scaled up to Baa2 from Baa3 -- after 13 years of wait. The outlook on the rating was also changed to stable from positive. Moody's also upgraded the country's local currency senior unsecured rating to Baa2 from Baa3 and its short-term local currency rating to P-2 from P-3.

The decision to upgrade the ratings came amid Moody's expectations that continued progress on economic and institutional reforms will, over time, enhance India’s high growth potential and 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.

Key elements of the government’s reform programme include the recently introduced GST, which will, among other things, promote productivity by removing barriers to interstate trade; improvements to the monetary policy framework; measures to address the overhang of non-performing assets (NPA) in the banking system; and measures like demonetizing high-value currency, the Aadhaar system of biometric accounts and targeted delivery of benefits through the Direct Benefit Transfer (DBT) system to reduce informality in the economy.

Other important measures that have yet to reach fruition include planned land and labour market reforms, which rely to a great extent on cooperation with and among states.