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Moody’s move lifts mood

Feb. 3: Moody’s Investors Service today upgraded India’s foreign currency debt and projected a stable outlook, but cautioned about the deteriorating fiscal situation limiting faster growth prospects.

The international rating agency upgraded the ceiling on foreign currency debt to Ba1 from Ba2 and that for bank deposits to Ba2 from Ba3, unifying it with the government’s Ba2 domestic currency debt rating which was not on review and was affirmed with a negative outlook.

“The principle reason for upgrading India’s foreign currency rating was the substantial improvement in the country’s liquidity position,” Moody’s said, adding the country’s foreign exchange reserves expanded mainly due to buoyant exports, dynamic infotech service sale and large remittances, which resulted in current account surplus.

Moody’s, in a statement, said the factors bolstering India’s external liquidity, including direct and portfolio investment, are likely to be sustained in the next two to three years.

Hailing the upgrade, awaited since November, a finance ministry spokesperson said “this only confirms what we have been saying that the economic fundamentals were strong and that India was managing its economy well.”

Moody’s, however, cautioned about the poor state of public finances warranting a negative outlook on the government’s Ba2 to domestic currency debt rating.

“Relying on growth of NRI inflow while failing to address the deteriorating fiscal situation increases the external position’s vulnerability to negative confidence shifts, even with limited capital account convertibility,” it said.

Moody’s warned that the risks of such a confidence shift rises with increasing government debt although the fiscal pressure was mitigated by the Centre’s ability to finance itself entirely through domestic banking system.

“Nevertheless, heavy public sector borrowing crowds out the credit available for the private sector and limits the prospects of much faster growth. These considerations constraints all of India’s rating inspite of country’s improved external liquidity,” it said.

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