Moody's upgrades India's bond rating : Changes outlook to stable

New Delhi: Stating that the reform programmes in India will complement the existing "shock-absorbance capacity" provided by India's strong growth potential, the US-based noted rating agency Moody's Investors Service on Friday upgraded India's sovereign credit rating by a notch to 'Baa2' with a stable outlook.

Amid strong anti-GST political campaign especially in poll-bound Gujarat, it also said that reform strategies like the Goods and Services Tax (GST) will promote productivity by removing barriers to interstate trade. "....measures which increase the degree of formality in the economy, broaden the tax base (as with the GST), and promote expenditure efficiency through rationalization of government schemes and better-targeted delivery (as with the Direct Benefit Transfer -DBT- system)," the agency said in its statement.

Welcoming the report, Prime Minister's Office (PMO) here said in a tweet: "Moody's believes that the @narendramodi government's reforms will improve business climate, enhance productivity, stimulate foreign and domestic investment, and ultimately foster strong and sustainable growth".

The rating upgrade comes after a gap of 13 years as the international agency had last upgraded India's rating to 'Baa3' in 2004. In 2015, the rating outlook was changed to 'positive' from 'stable'.

Interestingly, the last time the global rating has revised the rating was when the BJP Government led by Atal Bihari Vajpayee was in power.Moody's has also upgraded India's local currency senior unsecured rating to Baa2 from Baa3.It may be mentioned that the 'Baa3' rating was the lowest investment grade -- just a notch above 'junk' status.

"The decision to upgrade the ratings is underpinned by Moody's expectation that continued progress on economic and institutional reforms will, over time, enhance India's high growth potential and its large and stable financing base for government debt, and will likely contribute to a gradual decline in the general government debt burden over the medium term," Moody’s said in a statement.

Moody's has also raised India's long-term foreign-currency bond ceiling to Baa1 from Baa2, and the long-term foreign-currency bank deposit ceiling to Baa2 from Baa3. The short-term foreign-currency bond ceiling remains unchanged at P-2, and the short-term foreign-currency bank deposit ceiling has been raised to P-2 from P-3. The long-term local currency deposit and bond ceilings remain unchanged at A1.

"The government is mid-way through a wide-ranging program of economic and institutional reforms. While a number of important reforms remain at the design phase, Moody's believes that those 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," the statement said.Moody's said, - the reform program will thus complement the existing "shock-absorbance capacity" provided by India's strong growth potential and improving global competitiveness.

It pointed out that Government of India's 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" and also bring about improvements to the monetary policy framework; measures to address the overhang of non-performing loans (NPLs) in the banking system; and measures such as demonetisation.

The report also mentions about the Aadhaar system of biometric accounts and targeted delivery of benefits through the Direct Benefit Transfer (DBT) system intended to reduce informality in the economy. Other important measures which have yet to reach fruition include planned land and labor market reforms, which rely to a great extent on cooperation with and between the States.

"Most of these measures will take time for their impact to be seen, and some, such as the GST and demonetization, have undermined growth over the near term," it said.Moody's expects real GDP growth to moderate to 6.7 per cent in the fiscal year ending in March 2018 (FY2017). However, as disruption fades, assisted by recent government measures to support SMEs and exporters with GST compliance, real GDP growth will rise to 7.5 per cent in FY2018, with similarly robust levels of growth from FY2019 onward. Longer term, India's growth potential is significantly higher than most other Baa-rated sovereigns, the report said.(UNI)