Banks rally as Moody's upgrades India's rating

Banking shares are on a roll with the Nifty Bank index hitting new high, while Nifty PSU Bank index rallied 4% in early morning trade as Moody's upgraded the Government of India's local and foreign currency issuer ratings to Baa2 from Baa3 and changed the outlook on the rating to stable from positive.

Reacting the development, Nifty Bank index, which consists private and public sector banks, hit a new high of 25,890, up 2% on the National Stock Exchange (NSE) in intra-day trade. The index surpassed its previous high of 25,696 touched on November 7, 2017, in intra-day deals.

Nifty PSU Bank, the largest gainer among sectoral indices, was up 4% at 4,191 in early morning trade. By comparison, the benchmark Nifty 50 index was up 1.1% at 10,327 at 09:24 AM.

State Bank of India (SBI), Punjab National Bank, Bank of Baroda, ICICI Bank, Canara Bank, Axis Bank, Allahabad Bank, IDBI Bank, Bank of India and Syndicate Bank were up 2% to 4% on the NSE.

“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,” Moody's Investors Service said in a release.

Meanwhile, 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.

The government is mid-way through a wide-ranging program of economic and institutional reforms. While a number of important reforms remain at the design phase, Moody's believes that those implemented to date will advance the government's objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth. The reform program will thus complement the existing shock-absorbance capacity provided by India's strong growth potential and improving global competitiveness.

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. 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.

Most of these measures will take time for their impact to be seen, and some, such as the GST and demonetization, have undermined growth over the near term. Moody's 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. Longer term, India's growth potential is significantly higher than most other Baa-rated sovereigns.