Moody's ups India's sovereign rating on financial reforms

Moody’s today upgraded India’s local currency sovereign rating by a notch on the country’s efforts toward financial reforms and the economy’s capacity to face a crisis, a move that that will result in greater capital inflows and appreciation of rupee value.

Though the global rating agency has upgraded the local currency government bond grading from Ba2 to Ba1, it is still a notch below investment grade. Moody’s has a positive outlook on the rating, which means there might be a further upgrade later.

“The upgrade of the local currency sovereign rating to Ba1 was prompted by the Indian government’s adoption of a medium-term (2010-2015) financial consolidation strategy, which is supported by a broadening structural reform programme,” said Moody’s vice-president Aninda Mitra.

Meanwhile, Moody’s retained India’s foreign currency rating at Baa3 (the lowest investment grade) with a stable outlook, thus narrowing the gap between the local and foreign currency ratings to one notch. YES Bank Chief Economist Shubhada Rao said the upgrade will help greater capital inflows into the country and will have a positive impact on the pricing of overseas funds, besides marginally backing rupee’s appreciation against dollar. “Any improvement or upgrade augurs well in terms of global investment appetite. Going forward it will boost the capital inflow when risk appetite returns in the global market,” Rao said.

Moody’s said the government’s ongoing policy reforms, disinvestments, fuel subsidy reforms, along with impending tax reforms will support its financial and debt position, and may even outperform the government debt targets. After India’s financial deficit targets went awry due to the stimulus packages offered by the government to blunt the impact of the global financial crisis, many ratings agency had warned of sovereign ratings cuts.