International credit rating agency Moody’s Investors Services on Friday the 17th of November 2017, after a long gap of 14 years, upgraded India’s local and foreign currency issuer ratings to Baa2 from Baa3 and changed the outlook on the rating to stable from positive. The rating is one notch above investment grade.
Market reaction was positive with Sensex & Nifty up by more than 1%, 10 year benchmark g-sec yields were down by 11 bps and INR appreciatING by 0.8% against the USD.
The rating upgrade effect on the market is more sentiment driven rather than any on the ground benefits. Markets are normally way ahead of rating agencies and the INR has rallied sharply against the USD over the last couple of years, Sensex & Nifty are at record highs while FII’s have pumped in money into INR Bonds leading to fall in bond yields. Benchmark ICICI CDS spreads have come down sharply.
India’s macros have improved sharply since 2013 with CAD down from 4.75 levels to 1.3% levels, fiscal deficit down from 5% levels to 3.5% levels and CPI inflation down from over 10% to below 4% levels.
Going forward, markets will move on global risk factors and pace of domestic growth, which is down to 5.7% in the 1st quarter of this fiscal year against levels of 61% seen in 4th quarter of last fiscal year. The government has unveiled a INR 2.1 trillion bank recapitalization plan and a INR 6.9 trillion spending on toads to boost economic growth. Markets will keenly watch the budget for fiscal 2018-19 on details of funding for the outlays, which will drive gsec yields. Given record levels of equities, corporate earnings growth will be key for the market while for the INR, Fed rate hikes and market risk levels will determine the value.
Moody’s Rating Upgrade
Moody’s has also upgraded India’s local currency senior unsecured rating to Baa2 from Baa3 and its short-term local currency rating to P-2 from P-3. 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 rating upgrade for India comes at a time when rating agencies Standard and Poor’s (S&P) and Moody’s have cut China’s sovereign rating. Moody’s cut China’s long-term local and foreign currency issuer ratings to A1 from Aa3 in May citing that the country’s financial strength would erode in the coming years. S&P followed by cutting China’s long-term sovereign credit ratings one notch to A+ from AA- on September, holding that its prolonged period of strong credit growth had increased economic and financial risks.
“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. In the meantime, while India’s high debt burden remains a constraint on the country’s credit profile, Moody’s believes that the reforms put in place have reduced the risk of a sharp increase in debt, even in potential downside scenarios,” it said.
The Agency also stated that key elements of the reform program include the recently-introduced Goods and Services Tax (GST), 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 intended to reduce informality in the economy.