Why sovereign rating upgrade is important

KR Srivats New Delhi | Updated on January 09, 2018 Published on November 17, 2017


Moody's upgrade of India's sovereign rating is important as it would bring down the costs of overseas borrowing for India Inc. Also, it will bring down the cost of capital for the system and eventually reflect in terms of lower credit cost.

This is going to take some time to flow into the system, but the immediate impact will be on well rated corporates, say economy watchers.

Reacting to this development, Sriram Kalyanaraman, Managing Director & CEO, National Housing Bank, said this sovereign ratings upgrade shows the confidence on India and would definitely bring down cost of funds for India Inc.

Any international credit rating agency upgrading the sovereign rating clearly shows the faith they have on the country's economic policies."This will also have an indirect positive effect on our corporates when they borrow abroad. It will have a positive impact on corporate borrowing", Kalyanaraman told BusinessLine.

Economy watchers said this sovereign rating upgrade should also be construed as "positive" to the banking system over the long term.

However, the latest sovereign upgrade will not flow as better margins for the banks, given that bulk of their resources come through domestic deposits.

What they say

Ranu Vohra, Co-founder, MD & CEO, Avendus Capital, a financial services firm, pointed out that upgrades are not common or frequent. "This is happening after a long time and symbolises what is a manifestation of what's been going on the ground. It's not one or two moves but a set of say thousand smaller improvements on the ground that has contributed", Vohra told BusinessLine.

This Moody's sovereign rating upgrade will have large ramifications as it's not often that a developing country rating gets re-rated, he said.

"India has an opportunity to stand out among a group of emerging market countries. This will result in investors who are on the periphery taking notice and investing in the market more from debt and equity side," Vohra said.

He said that larger corporates will benefit, but not the smaller and mid-sized ones immediately. "Top corporates will definitely benefit. Iam not sure we can go across the Board on that across all corporates. But surely more investors will start to look at India", he said.

He also highlighted that this event has happened at a time when India's ranking in the ease of doing business index moved up 30 places. "All of this add up to an investor who is watching India from abroad and looking for the right time to put some capital in India. This might just swing it completely. This is huge positive and will play out in the next few weeks. Markets are yet to fully understand this", he said.

For banks, this Moody's India sovereign rating upgrade will result in a "healthier portfolio" over a period of time. "This move would have indirect impact on our banks", Vohra said.

Moody's Investors Service has upgraded India's sovereign rating for the first time since 2004, citing continued progress in the country's economic and institutional reforms.

"It's not quite often that Moody's type of organisation, which is conservative in its outlook comes up with an upgrade", Vohra said.

George Alexander Muthoot, Managing Director, Muthoot Finance, said that the Moody's ratings upgrade is a testimony of the fact that the Government's roadmap of fiscal reforms is on the right path.

This global recognition is a positive step for overall Indian economy and it will also help in attracting global inflows into India, he said.

It will also provide relief to corporates on their borrowing costs, Muthoot added.

Rana Kapoor, Managing Director & CEO, YES Bank, said the long overdue sovereign rating upgrade for India is an endorsement of institutional and structural transformations ushered in by the Government in the last few years while maintaining fiscal prudence.

This was earlier vindicated by the sharp jump in India's Ease of Doing Business ranking, he said. Such global ratifications will lower the cost of borrowing and boost investor confidence and conviction in the economy, according to Kapoor.

Sumeer Chandra, Managing Director, HP Inc. India said: "We believe that Moody's rating upgrade is a big boost for India, as it will improve sentiments around ease of doing business within local and global investors. This will also advance the Government's objective of enhancing productivity and driving sustainable growth".

Improvement in the credit profile will be a big positive for Indian companies and the Government.

Raman Agarwal, Chairman, Finance Industry Development Council (FIDC), a representative body of NBFCs, said that NBFCs have become a bright spot in the economy and the upgrade in the Sovereign Rating will further increase the shine and enable NBFCs to borrow at cheaper rates.

Published on November 17, 2017
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