Moody’s upgrades India’s sovereign bond rating

In a big boost to the government’s reform agenda, which has faced flak for slowing growth, international rating agency Moody’s on Friday upgraded India’s sovereign bond rating to Baa2 from Baa3 with a stable outlook.

“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 in a release on Friday morning.

While India's high debt burden remains a constraint on the country's credit profile, Moody's said that reforms put in place have reduced the risk of a sharp increase in debt, even in potential downside scenarios.

Foreign currency bond rating also improves

It 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.

The short-term foreign-currency bond ceiling remains unchanged at P-2, and the short-term foreign-currency bank deposit ceiling has been raised to P-2 from P-3. The long-term local currency deposit and bond ceilings remain unchanged at A1.

India has for long been trying pitching for an upgrade in its sovereign rating, citing reforms such as the Insolvency and Banking Code, goods and services tax and banking sector recapitalisation and power sector reforms as well as improved fiscal deficit.

The rating upgrade, the first since 2004, comes days after India’s position in the World Bank’s Ease of Doing Business rankings jumped up by a record 30 notches to the 100th spot.

Moody’s gave a thumbs-up the reform agenda, which seem to include demonetisation and said that 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

“On the fiscal front, efforts to improve transparency and accountability, including through adoption of a new Fiscal Responsibility and Budget Management (FRBM) Act, are expected to enhance India's fiscal policy framework and strengthen policy credibility,” it further said.

It however, said that the high public debt burden remains an important constraint on India's credit profile relative to peers, notwithstanding the mitigating factors which support fiscal sustainability.

Finance Secretary Hasmukh Adhia reacting to the rating upgrade said, "The path that Government has chosen for long term reforms and fiscal consolidation is well recognised by investors already. The rating agency too has now confirmed it formally, which is welcome."

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