Sixteen months after it warned of a downgrade, ratings agency Moody’s raised its outlook on India to positive, hoping for further steps from the Narendra Modi government to push growth. The finance ministry said this was significant and promised more.
“India has grown faster than similarly-rated peers over the last decade due to favourable demographics, economic diversity, as well as high savings and investment rates,” Moody’s Investors Service said, adding this will keep the country’s economic expansion on track.
“Moody’s decision to revise the ratings outlook to positive from stable is based on its view that there is an increasing probability that actions by policy-makers will enhance the country’s economic strength and, in turn, the sovereign’s financial strength over coming years.”
The agency, however, did not raise the sovereign credit rating from Baa3, awaiting more signs from the Indian economy. In December 2013, during the tenure of the United Progressive Alliance (UPA), it had warned of a downgrade that would have potentially hurt India’s global standing.
But Moody’s specified what could lead to an upgrade. “Evidence over the coming months that policymakers are likely to be successful in their efforts to introduce growth-enhancing and growth-stabilising economic and institutional reforms would lead to the rating being considered for an upgrade.”
Reacting to the development, Finance Minister Arun Jaitley said: “Moody’s has changed the rating outlook to positive from stable and affirms Baa3 rating. The upgrade in outlook is significant, but we’ve got to do more.”
The markets reacted positively. The sensitive index (Sensex) of the Bombay Stock Exchange (BSE) rose 177.46 points or 0.62 percent, to close at 28,885.21 percent.
Moody’s said its Baa3 rating reflects the fact that higher levels of growth and infrastructure development will be accompanied by better prospects, adding credit improvements over the next 12-18 months will depend on the extent to which growth, policies and buffers can contain risks.
“India’s Baa3 government bond rating incorporates the credit strengths, such as its diversified economy, robust growth prospects, relatively high domestic savings rate and a high international reserve buffers,” it said.
“It also reflects India’s weaker performance, relative to peers, on fiscal, inflation and infrastructure-related metrics. And while policies are beginning to address each of these factors, the extent of likely improvements is as yet unclear,” it said.
“Moreover, India’s banking system’s asset quality, loan loss coverage and capital ratios are relatively weak,” it said, and added this posed credit risks because of the financial sector’s role in financing growth and the government’s deficits.
“In the absence of any improvement in banking-system metrics over the coming months, India’s sovereign credit profile will remain constrained.”