Moody's raises India outlook to 'positive', edges toward ratings upgrade

By Suvashree Choudhury and Neha Dasgupta

MUMBAI (Reuters) - Moody's ratings revised India's sovereign rating outlook to "positive" from "stable" on Thursday, a step closer to an upgrade of the credit rating, as it expects actions by policymakers to lift the country's economic growth.

While there must be signs of sustainable growth from moves such as getting stalled infrastructure projects under way, the chance of a rating upgrade in the next 12-18 months has increased, Moody's sovereign rating analyst Atsi Sheth told Reuters.

"We're saying that over the next 12-18 months, if things continue to improve, the rating level might also go up," she said. "It is likely that there's a greater chance of rating going up than staying the same or going down."

Major credit rating agencies all have the lowest investment grade rating on India. Standard & Poor's and Fitch both rate the country's outlook as "stable".

Fitch later issued a statement affirming its 'BBB-', "stable" outlook on India.

"India's relatively weak business environment and standards of governance, as well as widespread infrastructure bottlenecks, will not change overnight, but there is ample room for improvement," the ratings agency said in a release.

Structural advantages, relatively benign commodity prices and liquidity conditions globally will keep India's growth above its peers, Moody's said. (http://bit.ly/1GqJyzY)

Moody's move came before markets opened. Indian stocks rose in early trade while bonds and the rupee were little changed.

"This is only a ratings outlook upgrade and not an actual upgrade. Markets will react positively when the actual event happens," said Harish Agarwal, a fixed income trader at First Rand Bank in Mumbai.

The Narendra Modi government, which came to power last May promising faster growth and more jobs, has fast-tracked some projects, removed policy uncertainty in mining and coal and let businesses acquire land for factories.

It has also relaxed rules on foreign investments in sectors such as insurance, e-commerce and railways.

CONSTRAINED CREDIT PROFILE

Key risks to India's credit profile are shocks from agriculture, global risk aversion, complacency on reforms, a weak banking system and high corporate leverage without a commensurate increase in profitability, Sheth said.

"If you don't have the policy effort, then your growth will come to a halt because either inflation will interfere, or the current account will interfere or the banking system metrics or some such will interfere," she added.

After a recent revision in measuring gross domestic product, which generated scepticism, India registered growth of 7.5 percent in October-December, higher than China's pace.

Based on the new method, the Reserve Bank of India expects India to grow 7.8 percent in 2015/16, below the government's 8.0-8.5 percent estimate.

Officials welcomed Moody's brighter outlook.

"The upgrade in outlook is significant but we've to do more," Finance Minister Arun Jaitley tweeted.

(Additional reporting by Rajesh Kumar Singh in New Delhi, and Abhishek Vishnoi and Swati Bhat in Mumbai; Editing by Richard Borsuk)