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Moody’s backs RBI measures

Mumbai, July 28: Global ratings agency Moody’s today said recent steps taken by the Reserve Bank of India (RBI), such as raising the foreign investment limit in government securities, were credit positive for the country’s sovereign rating.

India has a Baa3 rating — the lowest investment grade rating — with a stable outlook.

Last week, the central bank had raised the investment limit for foreign institutional investors (FIIs) by $5 billion to $25 billion. However, the Reserve Bank has reduced the investment limit for long-term investors to $5 billion from $10 billion.

The rating agency said the RBI move would increase foreign investment in government securities over the next several months, adding that this will improve India’s “incipient growth by helping to stabilise the domestic market interest and currency rates”.

Moody’s pointed out that the revised investment limit was not large enough for foreign ownership in government debt to cross 10 per cent, limiting the country’s exposure to global fluctuations.

The rating agency was, however, cautious about the apex bank’s decision to push infrastructure lending by providing various relaxations to lenders.

The RBI has exempted banks from key requirements for money raised through long-term bonds.

The banking regulator had said banks would not have to maintain the cash reserve ratio or the statutory liquidity ratio. Also, funds raised through this route will not be subject to priority sector requirements.

Moody’s has expressed apprehension that stoking lending in infrastructure comes with risks.

“During 2004-10, certain infrastructure sectors received considerable amounts of credit, which saw banks recording increases in non-performing assets and generally reporting weaker asset quality,” it said.

Moody’s remarks come at a time the ministry of finance is set to pitch for a ratings upgrade at a series of meetings with global agencies over the next couple of months.

Another agency Standard & Poor’s rates India at BBB-, also the lowest in investment grade, but with a negative outlook.

On the RBI’s future trajectory, Moody’s said global commodity price uncertainty and the likely pressure on food inflation front owing to weak monsoons will “preclude the RBI from implementing significant monetary stimulus this year”.

The RBI’s efforts will be directed towards exercising its supervisory and regulatory authority to nudge a sustainable acceleration in growth, it said.

 
 
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