You are here
Moody's upgrades India's credit rating in boost for Modi
[HONG KONG] Moody's Investors Service raised India's sovereign bond rating for the first time since 2004, citing continued progress in economic and institutional reforms.
The ratings firm upgraded India to Baa2 from Baa3 and said reforms being pushed through by Prime Minister Narendra Modi's government will help stabilise rising levels of debt. That's a shift from Moody's lowest investment-grade ranking to the second lowest.
The surprise move comes even as India surrendered its status as the world's fastest-growing major economy amid sweeping policy change. Growth slipped below 6 per cent in the April-June quarter, sparking expectations that the government will need to unleash fiscal stimulus.
Markets welcomed the move, even as some cautioned the response will be limited given the ongoing challenges that the economy faces.
"This is a positive surprise to the markets, especially in terms of timing," said Vivek Rajpal, a rates strategist at Nomura Holdings Inc in Singapore. "One fear that was developing in the market was debt-flow positioning."
Non-deliverable rupee forwards rose, with one-month contracts climbing 0.8 per cent. Spreads on dollar bonds from Indian companies tightened by around five basis points, according to traders who are not authorised to speak publicly and asked not to be identified. Stock futures in Singapore jumped as much as 1.2 per cent.
Mr Modi has pushed through sweeping reforms, with mixed results. Last year's removal from circulation of almost 90 per cent of the nation's currency weighed on growth. Other measures - such as efforts to cut red tape and the imposition of a new consumption tax - have met with mixed success. The government won praise from ratings firms for a US$32 billion programme to recapitalise banks that economists say will revive lending and stoke demand on the ground.
"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," according to the firm's release.
Moody's cited the goods and services tax, which it said will promote productivity by removing barriers to interstate trade, improvements to the monetary policy framework, measures to clean up non-performing loans, and efforts to bring more areas into the formal economy.
It noted most of the measures will take time for their impact to be felt, while some - such as GST and demonetisation - have undermined growth in the near term. Moody's forecast GDP (gross domestic product) growth of 6.7 per cent for the fiscal year ended March 2018, with a pick up to 7.5 per cent in the following year and "similarly robust" levels from 2019 onwards.
The upgrade comes after Indian sovereign bonds were sold off this week as consumer prices rose more than expected. The benchmark 10-year yield advanced past 7 per cent on Tuesday for the first time since September 2016.
Moody's is looking through the near-term political cycle ahead of state polls when "populism may overshadow reform momentum," according to Vishnu Varathan, Singapore-based head of economics and strategy at Mizuho Bank Ltd. The afterglow from the upgrade won't last long given the emerging signs of quickening inflation and a widening current account and fiscal deficit, Mr Varathan said.