All you need to know about Moody's credit rating upgrade for India

The rating upgrade will keep the rupee stronger, and will have a major impact on Bank Nifty, says A K Prabhakar of IDBI Capital

US-based rating agency Moody's on Friday upgraded India's sovereign credit rating by a notch to 'Baa2' from Baa3 and changed the outlook to stable from positive. 

The rating upgrade comes after a gap of 13 years - Moody's had last upgraded India's rating to 'Baa3' in 2004. In 2015, the rating outlook was changed to 'positive' from 'stable'.

The 'Baa3' rating was the lowest investment grade, just a notch above 'junk' status.

Moody's has also raised India's long-term foreign-currency bond ceiling to Baa1 from Baa2, and the long-term foreign-currency bank deposit ceiling to Baa2 from Baa3.

Impact on rupee and stock market

G Chokkalingam, Founder & MD, Equinomics Research & Advisory believes the rating upgrade will improve foreign debt inflows and in turn strengthen the rupee, instilling confidence in the economy. 

“Moody’s upgrade will trigger a virtuous spiral of more debt flows, equity flows, and FDI inflows, eventually strengthening the economic growth of the country,” he said.  

Although he expects the market to rally nearly 2-3%, but eventually everything will boil down to concerns on the corporate earnings front and actual FII inflows. 

A K Prabhakar of IDBI Capital also welcomed the move, saying it was much-awaited. 

The rating upgrade will keep the rupee stronger, and will have a major impact on Bank Nifty since the cost of fund for recapitalisation will likely come down. 

He expects Nifty50 to hit 10,700-10,900 by December end.

Reasons for upgrade

The decision to upgrade the ratings is underpinned by Moody's expectation that continued progress on economic and institutional reforms will, over time, enhance India's high growth potential and its 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, the rating agency said in a statement.  

It further said while India's high debt burden remains a constraint on the country's credit profile, Moody's believes that the reforms put in place have reduced the risk of a sharp increase in debt, even in potential downside scenarios.

Key reforms taken 

Reforms such as Goods and Services Tax (GST), demonetisation, measures to fight bad loans, Aadhaar and labor market reforms etc pushed Moody's to upgrade India rating. 

"Key elements of the reform program include the recently-introduced Goods and Services Tax (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 loans (NPLs) in the banking system; and measures such as demonetization, the Aadhaar system of biometric accounts and targeted delivery of benefits through the Direct Benefit Transfer (DBT) system intended to reduce informality in the economy," it said.

"Other important measures which have yet to reach fruition include planned land and labor market reforms, which rely to a great extent on cooperation with and between the States, the global rating agency added. 

Growth projections

While Moody's noted that GST and demonetisation have undermined growth over the near term, it expects real GDP growth to moderate to 6.7% in the fiscal year ending in March 2018 (FY2017). However, as disruption fades, assisted by recent government measures to support SMEs and exporters with GST compliance, real GDP growth will rise to 7.5% in FY2018, with similarly robust levels of growth from FY2019 onward, it said. Longer term, India's growth potential is significantly higher than most other Baa-rated sovereigns, it added. 

What could move rating down

Moody’s believes a material deterioration in fiscal metrics and the outlook for general government fiscal consolidation would put negative pressure on the rating. 
 

“The rating could also face downward pressure if the health of the banking system deteriorated significantly or external vulnerability increased sharply,” it said.