Moody's ratings are independent of other agencies' actions: Atsi Sheth

Interview with Senior vice-president for sovereign risk group, Moody's

After Standard & Poor's (S&P) move to upgrade India's outlook on sovereign ratings from 'negative' to 'stable', all eyes are on Moody's Investors Service. Moody's already has a 'stable' outlook for lowest investment rating for India. However, Moody's senior vice-president for sovereign risk group Atsi Sheth tells Indivjal Dhasmana sovereign ratings are not likely to change in the next one-and-a-half years. Outlook might also be retained at the current stable level, unless there is a dramatic change in India's growth, fiscal situation, inflation and balance of payments, she says. Edited excerpts:

Moody's representatives met finance ministry officials last month. Is there a possibility of a rating upgrade for India? Or would the first outlook be upgraded to positive? Similarly, is there any possibility of a rating or an outlook downgrade?

Our rating outlook is currently stable, reflecting our view that - at this time - we do not envisage that India's Baa3 sovereign rating (lowest investment grade) will be upgraded or downgraded over the next 12-to-18 months. Our rating and outlook incorporate our view that India's GDP will accelerate over the medium term, as well as our view that India's fiscal metrics will remain weaker than in comparably-rated peer countries over the same time horizon. If we believed that India's sovereign credit trends (including growth, fiscal, inflation, and balance of payments trends) were likely to change - in either a positive or negative direction - so significantly as to prompt a change in the Baa3 rating within a 12-18-month time horizon, we would change the rating outlook (to positive or negative) to reflect this view.

Will you be prompted by the S&P action - upgrading of outlook - to decide your move on India?

Our ratings our based on our own rating methodology and our analysis of credit trends.

Will the Supreme Court's decision on coal mines and continued postponement of gas pricing formula affect the ratings?

India's Baa3 sovereign rating already incorporates our view that one of India's credit challenges is the uncertain regulatory environment. Uncertainty is due both to delays in regulatory decisions and reversals of previous decisions. The mining and gas-pricing issues are examples of regulatory uncertainty, which affect the investment outlook and thus constrain the rating at its current level.

What will you tell investors about investment opportunities in the country through your ratings, given the fact that the new government says it is creating conducive environment for investors?

Our ratings are an assessment of credit risk. An improved operating environment would address one of the constraints on India's sovereign credit profile, if it creates conditions for higher, sustainable growth that is not subject to regulatory, infrastructure, balance of payments and inflation risks. The new government has announced that improving the operating environment is high on its policy agenda. However, until measures to achieve this are effectively implemented, the above-mentioned risks to growth will persist.

Given the size and complexity of India's economy, we expect that implementing these measures will take at least several quarters.

Soon after your representatives met the finance ministry officials, Finance secretary Arvind Mayaram said Moody's had concerns over fiscal deficit. However, the finance ministry says it will meet the 4.1 per cent target for FY15. Does this satisfy you?

We expect India's fiscal deficit and debt ratios to improve over the next three years, helped by higher tax revenues as well as some policy measures to cut expenditures. However, even with a reduction in the Central government's fiscal deficit, India's general government deficit - which includes state government deficits as well - is still higher than in comparably-rated countries in the region (such as the Philippines and Indonesia) as well as those outside the region. This relatively high government deficit and debt burden increases sovereign risk, due to the government's high borrowing requirement, as well as the significant portion of government revenues that are consumed by interest payments on government debt (leaving less for development and capital expenditure).

Retail inflation is still below the target of eight per cent set for January 2015 and in fact declined in August. What are your areas of concern in this regard as the finance ministry says India has adequate stocks to take care of contingency in case of sub-normal monsoon?

Persistently-high inflation has a number of negative credit consequences. For instance, it erodes international competitiveness, ultimately leading to balance of payments and exchange rate pressures. Moreover, higher interest rates to combat inflation keep growth subdued. India's inflationary pressures are persistent - stemming from a mismatch between demand and supply. Food inflation is one example - although food inflation has declined globally over the past few years (according to the Food and Agriculture Organization's index), it has increased in India. This is partly due to demand pressures stemming from demographics, increasing incomes and the large portion of these incomes that are spent on food. In addition, supply constraints - poor irrigation and food storage as well as distortions in pricing and distribution - have exacerbated food price pressures. Unloading food stocks can be an important contingency measure to address food price spikes in a particular year, but this measure alone is unlikely to close the gap between demand and supply over the medium- to long-term. On the other hand, measures to increase food output and create more efficient distribution and pricing could help food inflation pressures abate over the medium term, and this would support growth and competitiveness.