Moody’s Rating Upgrade – Is It Enough To Boost Investor Confidence?

Moody's Rating and Growth of Indian Economy

Moody's Rating and Growth of Indian Economy

Moody’s Investors Service, one of the largest credit rating agencies in the world, announced an upgrade of India’s sovereign rating – the first positive rating upgrade received by the economy from Moody’s in about 13 years. The move has been credited to the slew of economic reforms and policy changes initiated by Prime Minister Modi and his government. Moody’s has assigned India a BAA2 rating with a Stable outlook – up from BAA3 rating with a Positive outlook. The upgrade comes with a long term view of the economy, said experts. The credit rating agency has chosen to overlook short term uncertainties arising from the new fiscal initiatives of the NDA government.

Key Economic Reforms

The four key economic reforms that have been initiated by the Modi led NDA government that have been cited by the credit rating agency Moody’s as reasons for the rating upgrade include the rollout of Goods and Services Tax (GST), demonetisation of old INR 500 and INR 1000 notes, launch of Aadhaar, and the initiation of Direct Benefit Transfer. The Moody’s report reads, “Most of these measures will take time for their impact to be seen, and some, such as the GST and demonetisation, have undermined growth over the near term. Moody’s expects real GDP growth to moderate to 6.7 percent in the fiscal year ending in March 2018”.

Despite The Upgrade…

Some economic analysts have termed the upgrade a surprising and ill-timed one. They argue that the upgrade may serve to keep the investor spirits buoyant but is not a measure of the economic health and success of the country. According to recent reports, economic growth in the country has slowed down to about 5.7 percent – the lowest it has been in the past 3 years. The very reforms that Moody’s has mentioned – demonetisation and GST launch – have been blamed for the slowdown. Apart from this a hike in oil prices is threatening to widen the country’s fiscal deficit. This rise in the debt-to-GDP ratio of the country’s economy may not inspire foreign investors despite the upgrade of credit rating accorded by Moody’s.

One of the greatest advantages of an improvement in the country’s sovereign ratings is the increased ease of borrowing for the state. A credit rating upgrade is a well-considered stamp of approval or acknowledgement of the country’s economic policies and the macroeconomic fundamentals. What it usually does is that it makes international borrowing less expensive for the country and makes Indian bonds more sought after in international markets. Predictably, with the news of the credit rating upgrade spreading like wildfire, Indian bonds fell to about 6.94 percent. The euphoria, however, was short-lived and once again the interest levels scaled back to about 7.05 percent. This leads analysts to discount the upgrade and call it at best an international recognition of India’s positive commitment to fiscal reforms.

Will Others Follow?

After a gap of 13 long years Moody’s has decided to upgrade India’s credit rating. The question that is being asked across the country now is “Will other credit rating agencies follow?” Apart from Moody’s Standard and Poor and Fitch are the two other major credit rating agencies in the world. Standard and Poor has assigned India the lowest rating BBB- but with a Stable outlook. Fitch too has assigned our nation’s economy a BBB- rating with a Stable outlook. Experts believe that though Moody’s upgrade may have lifted the spirits of the domestic economy, if India is to receive a similar upgrade from the others, the finance ministry and other policy makers need to remain committed to the country’s fiscal health and the reforms initiated by the government must be followed up with robust action.

The Path Ahead

Critics of the NaMo government have not given in to the good cheer following the upgrade by Moody’s. They say that it has taken India many long years to finally gain an upgrade from the agency. India’s rating was downgraded to BAA3 in 1991, just before India was set to face a major financial crisis. before this, however, India enjoyed a BAA1 rating from Moody’s which is ahead of the current rating. Others, however, are not quick to discount the Moody’s move. They say that the upgrade comes at the back of a long term investor confidence in the country and should be regarded as one of the many milestones the country is set to achieve.