Moody's lifts India's mood, but will the party last?

Moody's lifts India's mood, but will the party last?

Soon after World Bank, one more global agency came in support of Prime Minister Narendra Modi government's economic reforms and gave a big applause to demonetisation and the Goods and Services Tax (GST), calling the move remarkable. This time, it was a credit rating agency whose recognition is much sought after by governments, corporates and investors as it enhances their creditworthiness and makes borrowing money from abroad a lot more easier.

Moody's Investor's Service, one of the three major global ratings agencies, upgraded India's sovereign credit rating notch higher than investment grade. It put India in the Baa2 investment grade from the earlier Baa3, which is the last category of investment grade rating. The outlook on the rating was also changed to 'stable' from 'positive'. This is India's highest credit rating by Moody's post liberalisation.

Moody's said it believed that the reforms implemented to date by the Modi government would advance the government's objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth.

A Rating upgrade, which came after a gap of 13 years, elicited quick response from the government with ministers and senior government officials taking to Twitter aggressively. Finance Minister Arun Jaitley called a media conference within hours of the news break. Among other thing,s he sent across the message to the Opposition, which has been criticising the government for disruptions in the economy due to note ban and GST implementation, to seriously introspect on their thinking.

In fact, it rained upgrade from Moody's for banks, other financial institutions and the government-owned oil and gas companies. Moody's also changed its rating outlook to 'stable' from 'positive' as risks to India's credit profile ebbed. Jaitley said it was extremely encouraging that there was international recognition of the government reforms, which followed a roadmap.

"The revision in ratings by Moody's is a positive development and is a great enabling factor for Indian financial markets. Simultaneously, the rating upgrade of SBI amongst others indicates that Indian Financial system remains resilient and robust and poised to support growth," Rajnish Kumar, Chairman, SBI said.

Over time, this will reduce borrowing costs of the government and financial institutions, and result in increased investor confidence in the India growth and reform story, he said.

It was around the same time last year that the government had criticised Moody's methodology to rate countries, when the US-based rating agency did not upgrade India despite the Prime Minister unleashing a wave of reforms since taking over in 2014. But it is inconsequential to discuss the past, when Moody's has lifted India's mood this year. The upgrade is significant as it came at a time when Moody's had downgraded neighbouring China expressing concerns that the country's financial strength would erode in the coming year. Another global rating agency S&P too downgraded the dragon.

Bigger issues

But the bigger issue here is whether or not this upgrade would prompt India to go for bolder reforms, whether further rating upgrades by Moody's would come easily to India's kitty and fast, whether other two prominent rating agencies Fitch and S&P too would follow suit or whether rising crude oil prices globally and fledgling exports, soaring inflation and a bigger fiscal deficit will spoil the party midway.

Global crude oil prices have been moving into an uncharted territory. Any upward move from $75 a barrel could exert pressure on the government's finances. Simmering tension between Iran and Saudi Arabia could spike oil prices to a much higher limit and could send markets into chaos. India, which imports 80% of its consumption, may be worst hit with larger economic ramifications.

Another key indicator, which the rating agencies watch closely is the fiscal deficit of a country as they think a higher deficit exposes the country to various kinds of shocks. India's fiscal deficit, according to an earlier roadmap, needed to go down to 3% in 2018-19 that is the next financial year from 3.2% now. But the finance minister on his most recent trip to Singapore last week hinted at relaxing the fiscal consolidation roadmap, implying the target date to meet 3% could be delayed by a year or two in the wake of two big bang reforms GST and demonetisation slowing the economic growth.

Now, this could have been the most disturbing news for Moody's, whose upgrade decision came much before Jaitley spoke his mind in Singapore. This is one indication, which may delay further upgrade by Moody's and hold back S&P and Fitch from doing so. Fitch and S&P, both rate India a notch below Moody's, and S&P had only last month said that for an upgrade, India would have to address its weak fiscal balance sheet and weak fiscal performance. Any decision on fiscal deficit roadmap revision in India is expected to come as a part of the Union Budget on February 1, 2018. Till then fingers crossed.

For now, India has joined countries such as Italy, Philippines, Spain, Bulgaria, Columbia and Uruguay after the Baa2 upgrade. It must now strive to save its position and consolidate. In the past, India has been downgraded from A2, a rating assigned to countries with low credit risk to Baa3 which is just above the junk grade.

Of various categories of investment grade, Aaa is ranked the highest with a little risk. Aa1, Aa2 and Aa3 have "very low" credit risk and A1, A2 and A3 grade countries have "low" risk. The Baa1, Baa2 and Baa3 countries have "moderate" credit risk and below that is "junk".

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