Moody's upgrades India outlook from stable to positive

Moody’s Investors Service on Thursday became the first big rating firm to upgrade India’s outlook from “stable” to “positive”, bringing the country a step closer to an actual sovereign rating upgrade.

The surprising development will raise investors’ confidence in the Indian economy, boosting the fortunes of the nearly 11-month-old Narendra Modi government, which has initiated a number of reforms to bring the economy back on track. Another global rating agency Fitch retained the credit outlook at “stable”, saying that though dynamism is back in the economy, translation of reforms into higher growth would depend upon actual implementation.

“Moody’s has changed rating outlook to positive from stable and affirms Baa3 rating. The upgrade in outlook is significant, but we have to do more,” Finance Minister Arun Jaitley tweeted.

Moody’s said the government was taking steps to improve economic strength. It said that a rating upgrade could follow in about 12 to18 months. India’s sovereign rating currently stands at Baa3, the lowest investment grade which is a notch above “junk” status. Moody’s, however, expressed concerns over the weak asset quality of banking system which it said posed sovereign credit risks because of the sector’s role in financing growth.

In the absence of any improvement in the banking metrics in coming months, India’s sovereign credit profile will remain constrained, it said. Moody’s has rated India at Baa3, at a par with countries like Indonesia, Iceland and Turkey since the past decade.

Commenting on the upgrade, RBI governor Raghuram Rajan said, “It is a positive perception of what we have done over the past few quarters.” “We should not celebrate upgrades as we did not worry about downgrades. There are lot of low-hanging fruits that need to be picked,” he added.

Chief Economic Adviser Arvind Subramanian said: “The upgrade validates government’s reform thrust, better growth, macro outlook, budget strategy of public investment and fiscal discipline.” Recently, another rating agency, S&P, upgraded its India outlook from “negative” to “stable”.