Moody's upgrades India's sovereign credit rating to 'Baa2' with stable outlook

17 Nov 2017 Evaluate

Citing improved growth prospects driven by the government’s wide-ranging program of economic and institutional reforms, Global credit rating agency Moody's Investors Services has upgraded India's sovereign credit rating by one notch to 'Baa2' with a stable outlook. The surprise move comes after a gap of 13 years - the rating agency had last upgraded India’s rating to 'Baa3' in 2004. The 'Baa3' rating was the lowest investment grade - just a notch above 'junk' status. In 2015, the rating outlook was changed to 'positive' from 'stable'.

The US-based agency believes that continued progress on economic and institutional reforms will, over time, enhance India's high growth potential and its large and stable financing base for government debt, and will likely contribute to a gradual decline in the general government debt burden over the medium term. However, it cautioned that high debt burden remains a constraint on the country's credit profile. It also believes that the reforms put in place have reduced the risk of a sharp increase in debt, even in potential downside scenarios.

Adding further, Moody's mentioned that while a number of important reforms remain at the design phase, those implemented to-date will advance the government's objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth. It also stated that reforms like Goods and Services Tax (GST) regime will promote productivity by removing barriers to interstate trade. Also, improvements to the monetary policy framework, measures to address the overhang of non-performing loans (NPLs) in the banking system and those like demonetisation, the Aadhaar system of biometric accounts, and targeted delivery of benefits through the Direct Benefit Transfer (DBT) system are intended to reduce informality in the economy.

On the GDP front, rating agency expects that the country’s economic growth to moderate to 6.7 percent in the fiscal year ending in March 2018. However, it said that as disruption fades, assisted by recent government measures to support SMEs and exporters with GST compliance, real GDP growth will rise to 7.5 percent next fiscal, with similarly robust levels of growth from FY2019 onward. It added that longer term, India's growth potential is significantly higher than most other Baa-rated sovereigns.

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