The Hindu Business Line : Moody's upgrades India's foreign currency ratings

THE international credit rating agency, Moody's Investors Services, has enhanced the `feel good factor' prevailing in the Indian economy, by upgrading the country's rating to Baa3, in two significant rating categories.

India's country ceiling for foreign currency bonds as well as the government's foreign currency issuer rating has been upgraded to Baa3 from Ba1. The outlooks for both ratings are stable.

Moody's said the upgrade in the ratings was due to a reduction in external vulnerability, rising foreign investment, and vibrant economic growth.

Bankers and other market players have welcomed the news as another shot-in-the-arm for the Indian economy.

Moody's has also revised upward its outlook on the Ba2 country ceiling for foreign currency bank deposits from negative to stable. The outlook on the Government's Ba2 domestic currency rating remains negative.

According to Moody's, the main motivation behind the rating changes is the reduction in external payments vulnerability. The country's foreign exchange reserves have risen to nearly $100 billion, a $30 billion rise in the year since these ratings were last raised. This amount is more than twice the value of the country's external obligations coming due over the next year and is also nearly large enough to cover a full year's current account payments.

The rating agency also cites the country's resilient economic performance, during 2002 drought-induced shock when GDP growth nevertheless stayed above 4 per cent. Forecasts for the current year's expansion have been adjusted upward to 8 per cent.

In the future, while growth may be lower than that witnessed this year, it is likely to remain robust as the product of more than a decade of gradual structural reforms and market liberalisation.

Aside from the opportunities for outsourcing and software services in the small but growing information technology segment, the restructuring of private and some public industry, which has benefited from the lowering of import tariffs and restrictions as well as foreign resource transfers, is being recognised by investors worldwide.

Vigorous import demand is likely to shift the current account from a modest surplus position to small deficits in the next two years, although capital account surpluses are expected to exceed any such shortfalls and further bolster reserves, according to Moody's.

Given the scale of the foreign assets, the government's payments capacity should be able to withstand any foreseeable shocks or capital outflows emanating from the otherwise worrisome fiscal situation. In addition, the reserves cushion provides room for a gradual easing of foreign borrowing restrictions and other capital controls.

Moody's says that concrete progress on controlling India's fiscal deficit across all levels of government is still desirable in order to stabilise the government's domestic currency rating. Accordingly, the agency will watch for more ambitious implementation of public sector and labour market reforms following the upcoming national elections.

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