Moody's thumbs up for Modi's policies

Upgrades outlook to positive

Global ratings agency Moody’s Investors Service on Thursday revised India’s sovereign rating outlook from ‘stable’ to ‘positive’, citing recent reform measures by the National Democratic Alliance government. However, it maintained the rating at the lowest investment grade.

The outlook upgrade means there are more chances of a rating upgrade. A higher rating would help boost the confidence of foreign investors in India’s economy.

The agency said the exact impact of the government’s actions would become apparent in 12-18 months and that would decide the action on India’s sovereign rating. Atsi Sheth, senior vice-president, Moody’s, told Business Standard the positive rating outlook for India reflected the agency’s view that there was a greater possibility that through the next 12-18 months, India’s sovereign credit fundamentals would improve to levels consistent with a rating higher than its current grade.

“Moody’s decision to revise the ratings outlook from stable to positive is based on its view that there is an increasing probability that actions by policymakers will enhance the country’s economic strength and, in turn, its financial strength through the coming years,” the agency said on Thursday.

The move by Moody’s comes on a day when Prime Minister Narendra Modi left for a week-long visit to Germany, France and Canada to seek greater investment from those countries.

Currently, India’s rating stands at Baa3, the lowest investment grade.

Two other premier rating agencies — Standard & Poor’s and Fitch Ratings — have also assigned India the lowest investment grade. Both have a stable outlook on India’s ratings. On Thursday, Fitch said it retained the lowest investment grade, as well as the stable outlook.

The Moody’s note said the agency believed recent measures to restrict inflation, keep external balances in check, simplify the regulatory regime for investors, increase foreign direct investment, and facilitate infrastructure development would reduce some of India’s sovereign credit constraints.

The outlook upgrade brought cheer to finance ministry officials, though policymakers said they would push for a ratings upgrade. “Moody’s has changed the rating outlook to positive from stable & affirms the Baa3 rating. The upgrade in outlook is significant but we’ve to do more,” Finance Minister Arun Jaitley tweeted.

A tweet by the PMO said: “The upgrade is the first ever in recent history due to 3 quarters of sustained hard-work by Modi govt”.

The upgrade validated the direction of the government’s reform programme and confirmed the growth prospects and the macroeconomic prospects for the economy were on the upswing, Chief Economic Advisor Arvind Subramanian said at a media briefing. “The Budget was successful in being able to push for public investment and growth without compromising the commitment to fiscal discipline. That is an important point because that’s what credit rating agencies focus on. It also validates the strategy in the Budget,” he said, adding while the government hoped for an investment upgrade going forward, that won’t be the sole driver for policies.

Former Prime Minister’s Economic Advisory Council chairman C Rangarajan said the move by Moody’s was justified, given there was a revival in economic activity. On when would India see a rating upgrade, he said, “I think the rating upgrade will come when economic growth picks up to eight per cent. It will take a year.”

In its note, Moody’s said policymakers were establishing a framework that was likely to allow the country’s economic growth to continue to better those of its peers in the medium term and improve the macroeconomic, infrastructural and institutional profile of the economy.

India’s economy is estimated to have grown 7.4 per cent in 2014-15, against 6.9 per cent in 2013-14. For 2015-16, the government expects growth to stand at 8.1-8.5 per cent.

Moody’s, however, cautioned recurrent inflationary pressures, occasional balance-of-payment pressures and an uncertain regulatory environment had contributed to volatility in growth and exposed India to external and financial shocks, constraining its credit profile.

Economists said the action by the rating agency was recognition of the steps taken by the Centre so far. “It is a clear reflection of some of the things taking place on the fiscal front, as well as the broader macroeconomic situation,” said Abheek Barua, chief economist, HDFC Bank. “On the fiscal front, there finally seems to be a plan for consolidation without compromising on the quality of the numbers.”

He said the Centre had shown resolve in getting some key Bills passed in Parliament but added key pieces of legislation such as the land law amendments, the constitutional amendments to a goods and services tax (GST) and the actual GST Bill would decide how far the government carry on its structural reforms agenda.

Moody’s said it affirmed the Baa3 rating keeping in mind India’s weaker performance on the fiscal, inflation and infrastructure-related fronts, compared to its peers. And, while the government’s policies were beginning to address these factors, the extent of likely improvements was still unclear, it said.

“The Indian banking system’s asset quality, loan loss coverage and capital ratios are relatively weak. This poses sovereign credit risks because of the sector’s role in financing growth and the government’s deficits through its purchase of government securities, and the contingent liabilities due to the government’s ownership of a major portion of the banking sector,” it added.