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Mumbai, Dec. 21: Moody’s Investor Services — the global credit rating agency — today raised India’s local currency rating by one notch to investment grade, which partially lifted the gloom that had settled on Indian bourses that had seen benchmark index returns tumble by about 25 per cent this year.
Moody’s upped the Government of India’s local currency bond rating to Baa3 from the earlier rating of Ba1, which is its highest junk bond rating.
As a result of today’s action, the ratings of both local and foreign currency government debt have been unified at Baa3.
Moody’s said the action was in accordance with its ratings implementation guidance that it would maintain a gap between a government’s domestic and foreign currency debt ratings “infrequently and only in compelling cases”.
“India’s Baa3 rating incorporates credit strengths such as a large, diversified economy, robust medium-term growth prospects and a strong domestic savings pool that facilitates the financing and refinancing of the government’s relatively high debt burden. It also encompasses credit challenges such as wide and persistent fiscal deficits, a policy process often hamstrung by domestic politics, susceptibility to inflationary pressures, and the limitations that poor social and physical infrastructure place on growth,” Moody’s added.
Moody’s also retained the stable outlook on India. It said this reflected its medium-term assessment of the country’s growth, fiscal, and balance of payments outlook, relative to other countries.
“Moody’s expects India’s growth downturn to persist over the next two quarters, but notes that GDP growth rates will remain above the average for similarly rated peers. Moreover, India’s structural strengths such as its diverse sources of economic growth and its private sector’s productivity will help revive investment growth over the next 12 to 18 months, if, as expected, inflationary pressures recede and domestic interest rates ease,” the ratings agency averred.
According to Moody’s, India’s foreign exchange reserves are large enough, relative to the country’s current account deficit and annual external debt repayment obligations, to allow the economy to face current portfolio investment volatility.
It noted that though the rupee depreciation would raise foreign debt repayment costs for individual firms, it could also help boost export competitiveness and soften import demand, thereby narrowing the current account deficit over the next year.
Moody’s, however, cautioned that weak fiscal metrics remained a constraint on India's rating.
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