New Delhi: In a relief for Prime Minister Narendra Modi's administration that is looking to attract foreign investment to revive the country's GDP hit hard by the outbreak of Covid-19 global pandemic, sovereign rating agency Moody's Investors Service Tuesday upgraded the Government of India's rating outlook from negative to stable while affirming India's foreign currency and local currency issuer ratings.
“The decision to change the outlook to stable reflects Moody's view that the downside risks from negative feedback between the real economy and financial system are receding. With higher capital cushions and greater liquidity, banks and non-bank financial institutions pose much lesser risk to the sovereign than Moody's previously anticipated,” Moody's said in its report.
While upgrading India's rating from negative to stable, the Moody's also said the risks stemming from a high debt burden and weak debt affordability remain. The agency, however, expects that the economic environment will allow for a gradual reduction of the general government fiscal deficit over the next few years, preventing further deterioration of the sovereign credit profile.
With Moody's upgrade, two of three large rating agencies – Standard and Poor's and Moody's have a stable outlook on India, while the third agency – Fitch – maintains a negative outlook for the country.
Moody's said the affirmation of the Baa3 ratings balances India's key credit strengths, which include a large and diversified economy with high growth potential and a relatively strong external position.
The agency also credited a stable domestic financing base for government debt, against its principal credit challenges, including low per capita incomes, high general government debt, low debt affordability and more limited government effectiveness, as the main reasons for upgrading India's rating. Moody's has kept India's long-term local-currency (LC) bond ceiling unchanged at A2 and its long-term foreign-currency (FC) bond ceiling unchanged at A3.
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Explaining the four-notch gap between the local currency ceiling and issuer rating, Moody's said it reflected limited political event risk that would significantly disrupt the economy. The agency also highlighted the fact that the public sector in India has large presence in the economy with limited predictability and reliability of government policies.
"The one-notch gap between the local-currency and foreign currency ceiling reflects limited external indebtedness and that, despite a history of several forms of capital controls, a debt moratorium remains unlikely," it said.
Moody's rating upgrade comes at a time when foreign direct investment (FDI), merchandise export, Forex reserve and India's stock markets are at a record high. According to the latest data shared by the ministry of commerce and industries, India received over $81 billion foreign direct investment in FY 2020-21 (April-March period), which is a record and 10% higher than the FDI received during the previous financial year.
Similarly, in July this year, the country recorded highest ever monthly exports at $35 billion and the exports during the first six months of the current fiscal (April-September 2021 period) were at over $197 billion, which is 57% more than the exports during the same period 2020, and nearly 24% more than the exports during the same period of 2019.
India's two most commonly tracked stock indices, BSE Sensex and NSE Nifty are hovering at record highs. While 30-share BSE Sensex is hovering near 60,000, more broad-based 50-share NSE Nifty is hovering near 18,000. And the country's forex reserve had touched its all-time high of over $642 billion early last month before declining marginally.
Why Moody's upgraded India's rating?
In its report, Moody's said the risks that a negative feedback loop between the financial sector and real economy set in have receded, resulting in lower susceptibility to event risk. The agency said, solvency in the financial system has strengthened, improving credit conditions which it expected to be sustained as policy settings normalize.
The agency also noted that the bank provisioning has allowed for the gradual write-off of legacy problem assets over the past few years and Indian banks have strengthened their capital positions that points to a stronger outlook for credit growth to support the economy. Talking about the state of the Indian economy, Moody's said that an economic recovery was underway with activity picking up and broadening across sectors.
“Downside risks to growth from subsequent coronavirus infection waves are mitigated by rising vaccination rates and more selective use of restrictions on economic activity, as seen during the second wave,” it said. Moody's also predicted real GDP growth to be around 6% over the medium term which reflects rebound in the economic activity.
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