Moody's upgrades India's sovereign bond rating for first time in 14 years

Move to help attract more foreign fund flows; India Inc could tap foreign capital at lower rates

Moody’s Investors Service on Friday upgraded India’s sovereign bond rating by a notch for the first time in 14 years, showing confidence in the Narendra Modi government’s reform initiatives such as demonetisation, the goods and services tax (GST) and its efforts to resolve the bad debt asset crisis of banks.

Moody’s raised the rating from the lowest investment grade of Baa3 to Baa2, and changed the outlook from positive to stable. “It is a belated recognition of the positive steps taken in the past few years. Many who had doubts about India’s reform process would now seriously introspect on their position,” Finance Minister Arun Jaitley said in response.

Analysts said the upgrade would lead to higher capital inflows, strengthening the rupee, and ease India Inc’s access to overseas capital at lower rates. The markets cheered the move. The Sensex rose 235.98 points to close at 33,342.80, even after paring initial gains. The Nifty crossed the 10,300-mark but ended at 10,283.60, up 68.85 points. In its biggest single-day surge in six weeks, the rupee gained 31 paise to end at a one-week high of 65.01 against the dollar. The 10-year bond yield, which fell 12 basis points on Friday, ended just 1 basis point lower.

Moody’s, however, warned the rating could be downgraded “if the health of the banking system deteriorated significantly or external vulnerability increased sharply”. “While a number of reforms remain at the design phase, Moody’s believes that those implemented to date will advance the government’s objective of improving business climate, enhancing productivity, stimulating investment, and ultimately fostering strong and sustainable growth,” it added.

Friday’s upgrade comes six months after Moody’s cut China’s sovereign rating by a notch. Even then, China’s rating is four notches higher than India’s. India is now behind only China in the BRICS bloc.

The upgrade also comes just weeks after India improved its ranking by 30 places to 100th for the first time in the World Bank’s ease of doing business report. 

Other global rating agencies were, however, more cautious in their outlook. Standard and Poor’s, which still assigns the lowest investment grade to India with a stable outlook, said India needed to address its weak fiscal position, indicating upgrades would take time.

India’s economic growth had slipped to an over three-year low of 5.7 per cent in the first quarter. The second quarter’s numbers would be out by the end of this month.  

Moody's pegged GDP growth at 6.7 per cent in FY18 and 7.5 per cent in FY19, with similarly robust levels of growth from FY20. "Longer term, India's growth potential is significantly higher than most other Baa-rated sovereigns," it said. 

The government had been trying to convince the agencies to upgrade ratings but did not get much positive response — except when Moody's raised the outlook on the lowest investment grade to positive in 2015.

Moody's also upgraded ratings for a slew of public sector companies — State Bank of India, Export Import Bank of India and Indian Railways Finance Corporation — and the private sector lender HDFC Bank on Friday. Rajnish Kumar, the chairman of the country's largest lender State Bank of India, said that over time, this would reduce the borrowing costs of the government and financial institutions and result in increased investor confidence in India's growth and reform story.  HDFC Chairman Deepak Parekh said, "I've always felt India's rating was far below than what it should be. Maybe, the bank recap move convinced them that India is on the reform path and we mean business." 

The outlook on new rating is stable — this means that factors that can lead to a downgrade of India's rating and the ones that can upgrade its score are evenly balanced. Earlier, the outlook was positive but on a lower rating, which indicated there were more chances of an upgrade than downgrade.