Moody's upgrade India's credit rating after 13 years

After a gap of 13 years, global rating agency Moody's on Friday upgraded India's sovereign credit rating from its lowest investment grade to Baa2 and gave a thumbs up to two big-ticket reforms -- demonetisation and GST – calling them remarkable.

Along with that, Moody's Investors Service also upgraded nine state-owned companies including ONGC, IOC, HPCL, NTPC   and GAIL and four financial institutions including SBI and HDFC and EXIM Bank.
The rating upgrade elicited a quick response from the government with Finance Minister Arun Jaitley saying it is a "belated recognition of positive steps taken in the last few years".

"Many who had doubts in their minds about India's reform process would need to now seriously introspect on their thinking," said Jaitley, hours after news broke.

"Moody's believes that those (reforms) 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," the rating agency said in a statement.

Stock, bond and rupee markets gave a thumbs up to the rating upgrade with the Sensex and Nifty ending with more than 0.5% gains. Rupee surged as much as 1.1%. Lenders said banking sector is expected to gain the most after the rating upgrade as overseas funds are expected to get cheaper.

Along with the rating upgrade, the Moody's also changed the outlook for India's rating to stable from positive.

"Government efforts to reduce corruption, formalize economic activity and improve tax collection and administration, including through demonetization and GST, both illustrate and should contribute to the further strengthening of India's institutions," the rating agency 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," it said.

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.

Moody's also expected the real GDP growth to moderate to 6.7% in the fiscal year ending in March 2018.

"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% in FY2018 (2018-19), with similarly robust levels of growth from FY2019 (2019-20) onward. Longer term, India's growth potential is significantly higher than most other Baa-rated sovereigns," it said.