India’s Sovereign Rating Highest Since 1988

Last Updated on December 13, 2017 by Bharat Saini

Moody’s Investors Services, the Global credit rating agency, upgraded India’s sovereign rating to the highest since 1988, on 17 November 17, raising it for the first time in 13 years, citing the country’s high growth potential in the years to come, and its large and stable financing base for government debt, that will likely contribute to a gradual decline in the general government debt burden over the medium term. It acknowledged India’s improved macroeconomic situation due to economic and institutional reforms. It was a huge shot in the arm for Modi Government,  as the rating will lead to boosting India’s sentiments globally, leading to greater investment in the country, and reduction in cost of funds.

Moody’s has upgraded:

• India’s Local and Foreign Currency Issuer Ratings to Baa2, just a notch above the lowest investment grade of Baa3 earlier.
• Outlook on the Country to Stable from Positive.
• Local Currency Senior Unsecured Rating to Baa2 from Baa3
• Local Currency Rating to P-2 from P-3.
• Long-term Foreign Currency Bond Ceiling to Baa1 from Baa2
• Long-term Foreign Currency Bank Deposit Ceiling to Baa2 from Baa3
• Short-term Foreign Currency Bank Deposit Ceiling to P-2 from P-3

The Rating Agency kept unchanged India’s Short-term Foreign Currency Bond Ceiling at P-2 and Long-term Foreign Currency Deposit & Bond Ceilings at A-1

Moody’s Long-term ratings Aaa denotes the highest quality & lowest credit risk, Aa1 to Aa3 denote high quality & very low credit risk, A1 to A3 denote upper-medium grade & low credit risk, and Baa1 to Baa2 denote medium grade, with some speculative elements and moderate credit risk.

Speculative Long-term ratings are from Ba1 to Ba3 and B1 to B3; and Caa1 & Caa2 are poor quality and very high credit risk ratings. Ca is judged to be highly speculative and with likelihood of being near or in default, but some possibility of recovering principal and interest.

Its Short-term ratings Prime-1 or P-1 denotes best ability to repay short-term debt, Prime-1/Prime-2 denote best ability or high ability to repay short term debt, Prime-1/Prime-2 denote best ability or high ability to repay short term debt, Prime-2 High ability to repay short term debt, Prime-2/Prime-3 High ability or acceptable ability to repay short term debt, Prime-3 Acceptable ability to repay short- term debt. Not-Prime does not fall within any of the prime categories

Moody’s had last upgraded country’s rating to Baa3 in January 2004 during Atal Bihari Vajpayee government, citing “reduction in external vulnerability, rising foreign investment, and vibrant economic growth” for the upgrade at that time.

Moody’s upgrade has been driven by some of the recent structural reforms that are expected to help ensure a healthier enabling environment to realise this potential over the longer term and include:

• Implementation of nationwide Goods and Services Tax (GST) that will promote productivity by removing barriers to interstate trade.
• Steps taken to broaden the tax base
• Demonetisation to enlarge the formal economy by mainstreaming more and more businesses from the informal sector
• Recapitalisation of Public Sector Banks
• Moves to address the logjam of mounting bad loans (NPAs) in the Banking sector through an Insolvency and Bankruptcy Code.
• Flexible Inflation targeting and Monetary Policy Committee based Monetary Policy Framework
• AAdhar Linkage & Direct Benefit Transfer aimed at improving spending efficiency through better targeting of welfare measures
• The large pool of Private Savings available to finance Government Debt
• New Fiscal Consolidation Framework

Moody’s believes that the reforms undertaken until now would “advance the government’s objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth.” And viewed in conjunction with the sizeable foreign exchange reserves, India’s overall capacity to absorb shocks is now seen as much better.

Moody’s expects real GDP growth in India to moderate to 6.7% in the fiscal year 2017-18 and believes that the disruption effect of demonetisation and GST reforms will fade as the government helps small and medium enterprises and exporters with compliance issues under the new indirect tax regime and growth will rise to 7.5% in 2018-19, and remain robust, thereafter.