Moody’s Ups Rating To Baa2 After 14 Years
The upgrade is a booster shot to the economy caught up in short-term woes
Photo Credit : PTI
It came as a pleasant surprise. After a long fourteen-year wait, global rating agency Moody's upped the country’s local and foreign currency issuer ratings to `Baa2’ from `Baa3’ and changed its outlook to “stable” from “positive”. 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”.
All eyes are now on Mint Road’s policy review on December 6 – will it signal a lending rate cut? Bank of America-Merrill Lynch said in a note that while CPI inflation has climbed 30 basis points to 3.6 per cent in October (and is tracking 4.5 per cent in December)… the bulk of the increase came from a temporary onion and tomato price spike. “Even if we go wrong on December 6, concerns of a RBI (rate) hike are to us surely exaggerated. We think RBI action is hardly going to quell a onion and tomato price hike, especially when the statistical link between CPI inflation and RBI policy rates is so tenuous to begin with”, it said.
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”, the rating agency said.
It was pointed out that while a number of important reforms remain at the design phase, the ones 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 reform program will thus complement the existing shock-absorbance capacity provided by India's strong growth potential and improving global competitiveness”, it said.
The drivers behind the upgrade were the Goods and Services Tax (GST); steps to tackle dud-loans, demonetisation, Aadhaar and Direct Benefit Transfer; and moves on the anvil like land and labour reforms.
Most of these measures will take time for their impact to be seen, and some, such as the GST and demonetisation, have undermined growth over the near term. Moody's expects real GDP growth to moderate to 6.7 per cent at end-March’18. 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… with similarly robust levels of growth from FY2019 onward. Longer term, India's growth potential is significantly higher than most other `Baa-rated’ sovereigns.
Moody’s upgrade sure is a booster shot; if Mint Road obliges with a rate cut on December 6, a fair bit of animal spirits will awaken!