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Moody’s holds out rating upgrade hope

Mumbai, Oct. 16: Moody’s Investors Service, the leading international rating agency, today said it might upgrade India’s foreign currency debt rating to investment grade in view of the country’s huge foreign exchange reserves.

However, even as Moody’s perception of the foreign currency debt position is changing for the better, the agency reaffirmed its negative outlook on the country’s domestic debt rating.

Moody’s has a ‘Ba1’ rating on the country’s foreign exchange debt following an upgrade in February. “It reflects the ongoing improvement in the country’s external position,” Moody’s said.

The changing perception is inspired mainly by India’s burgeoning reserves. Moody’s said the country’s reserves were equivalent to about 10 months of current account payments and adequately covered external debt service requirements.

The country’s reserves aggregate to nearly $88 billion, up $17 billion in 2003 on the back of strong trade and investment inflows. The Indian rupee is also gaining vis-à-vis the dollar.

Helping the cause of India’s foreign reserves are the growing number of foreign funds that have added nearly $4 billion worth of Indian shares to their portfolios this year, about five times their net investment in the whole of last year.

The last 14 days have seen FIIs investing Rs 3,500 crore in India, and takes the total investment for the whole year to Rs 18,115 crore for the current year.

How this would benefit Indian companies to borrow cheaper foreign funds, is still being debated in the forex circles. A forex dealer said it is unlikely that Indian companies could take advantage of this upgrade because of limits set on overseas borrowings by the Reserve Bank.

While Moody’s was gung ho about the foreign reserves position, it was less effusive on the fiscal situation. Terming it a disappointing contrast to the country’s strong external position, Moody’s said serious efforts to address the issue were unlikely with national elections due next year. The rating agency, therefore, retained its negative outlook on the federal government’s ‘Ba2’ domestic currency rating and the ‘Ba2’ ceiling for foreign currency bank deposits, citing the dire fiscal situation.

Hailing Moody’s gesture on a possible upgrade of India’s foreign currency debt rating, the finance ministry today hoped this would translate into final upgrade in view of strong economic fundamentals and burgeoning forex reserves.

“Though it has come late, it is better late than never,” chief economic adviser Ashok Lahiri said here. He added that the possible upgrade would turn into a real upgrade in the near future.

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