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4 things to read in Moody's rating commentary
Moody's, a global credit rating agency, upgraded, India's local and foreign currency ratings to Baa2 from Baa3. India's short-term local currency rating moved to P-2 from P-3, while the short-term foreign currency rating remains unchanged at P-2. The outlook on the rating is shifted to stable from positive.
The agency issued a statement that makes interesting reading.
Here are four important points they make:
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Government reform policies acknowledged:
Credit rating agencies assign the credit rating to a country based on a number of factors like fiscal management, macroeconomic indicators, the government economic reform policies among other things. The rating assigned to the country determines the rate of interest for the overseas borrowing of a country and companies based in that country. Moody's acknowledged the pro-business policies taken by the government. The implementation of the Goods and Services Tax (GST) can allow free movement of goods across states and enhance productivity. In 2016, the government debt stood at 68% of the Gross Domestic Product (GDP), a level significantly higher than the median ratio for Baa rating. Despite this data, Moody’s upgraded India's rating as 90% of the debt is rupee denominated and owed to domestic institutions. Moody's expects the debt to GDP ratio to increase by 1% in the current fiscal year. However, the debt servicing can be smoother due to the widening of the tax base and expenditure efficiency. All these factors make overseas borrowing for Indian companies cheaper.
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First rating upgrade in 13 years
India's credit rating was A2 in 1990. Post that, India witnessed rating cuts. The last rating upgrade happened in January 2004 when Moody's raised the rating to Baa3 from Ba1 and maintained a stable outlook. The new rating Baa2 is above the lowest investment grade and it puts India in line with Philippines and Italy. Moreover, the gap between India and China's credit rating is now four notches. This would be taken into account when foreign institutional investors or businesses decide to invest in India.
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Foreign play:
Foreign institutional investors play a key role in India’s capital markets. In a situation where exports are showing a slow growth, FII and foreign direct investment flow matter. A rating upgrade at this stage means a lot of institutional or business investors who decide to invest in a country based on the rating assigned will consider investing in Indian debt market or equity market. A higher investment rating does not mean any change in economic fundamentals of an economy. However, it helps in improving the overseas investing sentiment.
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Challenges and opportunities:
The rating improvement is a double-edged sword for the Indian government. On one end, the recovery in the investment cycle, improvement in reforms, and strengthening of fiscal metrics can lead to a rating improvement in the future. Implementation of pending labour and land reforms can be positive steps in that direction. The credit rating may be downgraded if the health of the banking system deteriorates. Moreover, the deterioration of fiscal parameters like inflation, GDP, external debt, and current account balance may affect the credit rating in the future.
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7.5%
Moody’s India’s GDP growth to be 7.5% in 2018-19. The favourable rating and outlook on growth resulted in share prices surging in India. The market capitalisation of BSE-listed companies rose Rs 1.71 lakh crore on the day of the announcement.
