Moody's raised India's credit rating outlook to positive from stable, marking a robust endorsement of policy initiatives by the Narendra Modi government aimed at reviving growth and putting it ahead of other economies. Rival rating agency Fitch was more circumspect, praising the reform initiatives but leaving the outlook unchanged.
A rating upgrade could be possible in the next 12-18 months, Moody's said. Fitch will wait to see the growth impact that the economic changes have once they are fully implemented.
The three big rating agencies -Standard & Poor's, Moody's and Fitch -have India at the lowest investment grade, just a notch above `junk' status.
“The upgrade in outlook is significant but we've to do more,“ Finance Minister Arun Jaitley tweeted after Moody's raised the outlook and affirmed its Baa3 rating. The assessment backs the government's revival strategy, chief economic advisor Arvind Subramanian said.
“This upgrade of the outlook validates the government's reform thrust -better growth, macro outlook, (the) budget strategy of public investment and fiscal discipline,“ Subramanian said. “It confirms the fact that growth and macro-economic prospects of the country are improving. The focus of the government is what needs to be done for the sake of economy and we hope for an investment upgrade. But that will not drive our policy going forward.“
The sovereign rating and outlook are seen as a gauge of investment climate, something the government has been eager to improve, besides determining overseas borrowing costs.
“India has grown faster than many other peers over the last decade and the actions of the policymakers should further boost the country's economic and financial strength in coming years,“ Moody's said in a statement. “The ability of policymakers to strengthen India's sovereign credit profile to a level consistent with a higher rating will become apparent over the next 12-18 months.“
Fitch said the Modi government's programme is bringing about a change in sentiment. This had turned gloomy in the final years of the previous United Progressive Alliance government as growth slumped to decadal lows and projects got stalled. The current administration took over in May last year and has sought to boost investor confidence through a series of measures including higher limits on overseas investment in insurance companies.
“The government's broad-based structural reform agenda has brought dynamism back to the Indian economy, after a couple of years of limited progress on the structural front,“ Fitch said in a statement, pegging India's growth at 8% in the current fiscal and 8.3% in FY17.However, it joined others in questioning the new GDP numbers based on a fresh series that offers a surprisingly sunny growth number.
The finance ministry had pitched for an upgrade in interactions with ratings agencies last month.
The stock market was indifferent to Moody's outlook upgrade, swinging be tween gains and losses for most of Thursday. Benchmark indices rallied early in the day after the announcement but gains fizzled out as traders booked profits at higher levels. The Sensex rose 0.62% to close at 28,885.21 points. The Nifty gained 0.73% to 8,778.30. The banking sector, which is expected to be the biggest beneficiary of the ratings action, saw shares price rise up to 7%. The Fitch announcement came after the market close.
Constraints to Upgrade Moody's said that the Indian economy is still heavily exposed to external and financial shocks, reasons why it did not raise the Baa3 rating.
Fitch pointed to the “limited improvement in India's fiscal position, which is a longstanding key weakness. India's fiscal Achilles' heel is evident in both the general budget deficit of 7.2% of GDP for the combined central and state governments, and gross general government debt of 64.7% of GDP, which are much higher than `BBB' category medians of 2.7% of GDP and 41.4% of GDP, respectively.“
Moody's has rated India at Baa3 since 2004 -on par with countries such as Indonesia, Iceland and Turkey.
Other factors that constrain India's rating are high inflation, central and state government debt, infrastructure sector hurdles and bad loans in the banking system. Standard & Poor's recently upgraded its India outlook to `stable' while Fitch Ratings has had a `stable' outlook for the country's credit rating since 2013.
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