Moody's Upgrades India By A Notch On Reform Progress

Marsha Scott
November 19, 2017

Maintaining that the upgrading was based on New Delhi's "wide-ranging programme of economic and institutional reforms", Moody's simultaneously changed the outlook for the country's rating to stable from positive and upgraded India's local and foreign currency issuer rating to Baa2 from Baa3.

"Key elements of the reform program include the recently-introduced Goods and Services Tax (GST) which will, among other things, promote productivity by removing barriers to interstate trade; improvements to the monetary policy framework; measures to address the overhang of non-performing loans (NPLs) in the banking system; and measures such as demonetization, the Aadhaar system of biometric accounts and targeted delivery of benefits through the Direct Benefit Transfer (DBT) system meant to reduce informality in the economy", the global credit rating agency has said in its statement. "It is a belated recognition of the positive steps taken in the past few years".

The global rating firm also backed the reforms undertaken the Modi government saying; "Moody's believes that those (reforms) implemented to date will advance the government's objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth".

"It will boost capital flows & allocations and will improve the availability of overseas funds". The markets cheered the move. The Nifty 50 touched a new intra-day high of 10,343.60 points. Rupee surged as much as 1.1%.

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The decision by Moody's is a shot in the arm for Prime Minister Narendra Modi's government and the reforms it has pushed through, and comes just weeks after the World Bank moved India up 30 places in its annual ease of doing business rankings. This upgrade puts Moody's one notch ahead of Fitch and S&P, which now has India on BBB- (stable), noted ANZ in a research report. Moody's had last upgraded India's rating to "Baa3" in 2004.

Even if recent economic reforms have seen near-term negative growth impacts, there have been some benefits. The second quarter's numbers would be out by the end of this month. "Longer term, India's growth potential is significantly higher than most other Baa-rated sovereigns", it said.

These measures increase the degree of formality in the economy, broaden the tax base (as with the GST), and promote expenditure efficiency through rationalisation of government schemes and better-targeted delivery (as with the DBT system) will support the expected, though very gradual, improvement in India's fiscal metrics over time, it said.

Arvind Chari, Head, Fixed Income & Alternatives, Quantum Advisors, said the ratings upgrade seems to have come at a wrong time as the government is facing pressures on the fiscal front.

Other reports by MaliBehiribAe

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