Moody’s Upgrade

Why the upgrade now and what exactly does it mean?

A full 14 years after India exited the speculative grade in 2004 Moody’s finally upgraded India’s rating a notch from Baa3 to Baa2. This literally puts India on par with most of the quality BRICS nations. While the arguments for and against the timing of the upgrade, can be proffered, the reality is that India surely has reasons to celebrate.…

What triggered the upgrade?

A major question following the rating upgrade was, Why Now? As Moody’s explained in its note, there were four triggers for the rating upgrade. Firstly, there was a clear indication that the reforms process was in auto-mode. The speedy implementation of the GST Bill, digitization through demonetization, bank recapitalization all point towards an urgency to push the reforms process. Secondly, Moody’s was impressed by the strengthening of the institutional framework including an independent GST Council, an MPC for monetary policy and a separate public debt agency. All these promoted greater transparency. Thirdly, the government focus on controlling the fiscal deficit was much appreciated. In each budget, the government has reiterated its strong commitment to the FRBM targets. Lastly, the big trigger was the bank recapitalization program announced by the government. The Rs.2.3 trillion allocation means that banks will again be able to expand their loan books and also meet the Basel-IV deadline!
What are the risks from here?

Moody’s has highlighted a few key risks to the Indian economy despite this upgrade. For starters, Moody’s has expressed concerns over the low level of GDP per capita, which is not even comparable to most central Asian economies in nominal terms. Oil prices continue to be a major external risk for India. At $60, the situation is already worrisome and if oil gets closer to the $70 mark then it could have a really negative impact on the balance of trade. Lastly, while the fiscal deficit is under control, greater public spending could lead to a spike in the deficit ratio.

What are the implications?

To be fair, this rating upgrade will have quite a few positive ramifications. The risk-off trade that was the highlight of FPI trading throughout 2017 could gradually reverse. The foreign direct investment, which is more a function of business climate, is also likely to improve. India is already the world’s largest recipient of FDI! It is also likely to bring down the yields on bonds as was already evident from the fall in the 10-year bond yields. This is likely to reduce the cost of borrowing in India and also for ECB borrowings abroad. But above all, it will reduce the cost of capital and make Indian equities more valuable in fundamental terms. The sharp rise in the Nifty on 17th Nov could just be a sign of things to come! ©

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