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Moody’s Investors Service raises India’s sovereign credit rating to Baa2

Global ratings agency Moody’s Investors Service raised India’s sovereign credit rating to ‘Baa2’ from ‘Baa3’ on November 16, 2017. The credit rating agency asserted that continued progress on economic and institutional reforms will enhance the India’s high growth potential. Moody’s also changed its rating outlook from stable to positive, saying that at the ‘Baa2’ level the risks to India’s credit profile were broadly balanced. It has taken India 26 years to get a credit rating higher than Baa3 from Moody’s. This would give assurance to investors and lenders that the Indian economy is a prospectively a better investment and lending destination than before. Market actually received the news with the expected zeal and enthusiasm. The rupee jumped to 64.63 per dollar after the Moody’s upgrade, against November 16th close of 65.32. The BSE benchmark index Sensex rose more than 400 points to 33,520 while the NSE Nifty surged over 120 points in the opening trade. But any analysis of this upgrade should not be done under irrational exuberance. There are miles to go before India becomes a permanent apple of investors’ eyes.

The agency claimed the initiatives, including demonetisation and Goods and Services Tax (GST), taken up by the government would strengthen India’s credit powers, boost growth prospects and global competitiveness. The reforms would likely contribute to a gradual decline in the general government debt burden over the medium term. Among the reforms Moody’s mentions as responsible for upgrade of India’s credit rating are GST, demonetisation, the inflation-targeting monetary policy framework, the Bankruptcy Act, bank recapitalization, Aadhaar and the Direct Benefits Transfer system. Moody’s believes demonetisation has strengthened institutions by being a part of the government’s efforts to “reduce corruption, formalize economic activity and improve tax collection”. After the agency upgraded the credit ratings on November 17, it received criticism from several quarters on the basis that while India is lacking on the economic growth front and its debt-to-GDP ratio is on the rise, the report gave thumbs up to the economic initiatives taken up by the government. Moody’s explained that current the slowdown in the economic growth – India’s GDP growth slowed to 5.7% in the first quarter from 6.1% in the previous quarter – was the factor it lowered India’s growth forecast to 6.7% in 2017-18. But, Moody’s said, the structural reforms makes the country’s growth potential strong, “stronger than most peers”. “Combined with a large and diversified economy and improving global competitiveness, this boosts economic strength, our view of an economy’s shock absorption capacity, which we assess as “High (+)”, the fourth highest score on our 15-rung sovereign factor score scale.” The agency had earlier posed faith in India’s economic reforms, saying they could improve the business climate, productivity, stimulating foreign and domestic investment, and hence fostering strong and sustainable growth.

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