India’s outlook upgraded to positive, rating remains unchanged: Moody’s

Global rating agency, Moody’s, enhanced India’s sovereign outlook from stable to positive (bringing it closer to an actual rating upgrade), expecting a push from policy-makers to put measures in place to spur growth and put India ahead of its peers. This development is significant, given the importance it would have on raising investor confidence in the Indian economy (sovereign ratings play an important role in global investment decisions and credit access).

In a statement, Moody’s Investors Service explained that the decision to revise the outlook from stable to positive was based on the high probability that actions taken by policy-makers shall enhance the country’s economic indicators, and thereby its financial strength. It added that since India has grown faster than similarly-rated peers over the last decade (owing to favorable demographics, economic diversity, and high savings and investment rates), India is now favorably positioned in the global economic climate with projected growth rates higher than those of its peers. The recent RBI monetary policy review projects the growth rate at 7.8% for the current financial year (ahead of 7.5% for the FY’15).

The current Baa3 rating is characterized by the risk that higher levels of growth and infrastructure development involve is accompanied by higher leverage. The improvements in sovereign credits shall occur over the next 12-18 month and depends upon the extent to which growth, policies and buffers can contain risks.

Earlier, during the regime of United Progressive Alliance (UPA)-led government, the agency had warned of a downgrade if the government policies were seen as stale.

Much needed banking sector reforms

The Finance Ministry is pleased with the upgrade as it stamps the positive changes in the economy since the new government took over last year. While pleased with the news, Finance Minister Arun Jaitley, said that much was still to be done. India’s banking sector is reeling under unproductive loans and poor management in public sector banks, and banking sector reforms, though much needed, are still not being pushed.

Affirming this, the agency said “India’s banking system’s asset quality, loan loss coverage and capital ratios are relatively weak” and in the absence of any improvement in banking-system metrics, India’s sovereign credit profile would remain constrained.

While India’s Baa3 government bond rating incorporates credit strengths (diversified economy, robust growth prospects, relatively high domestic savings rate and high international reserve buffers), India’s performance on the fiscal, inflation and infrastructure-related metrics remains weaker than its peers. Though policies are being put in place to address each of these factors, the extent of likely improvements remains unclear at the moment.

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