Moody’s raises outlook for India’s rating from “negative” to “stable”

Moody’s Investors Service on Tuesday changed its outlook for India’s sovereign ratings from negative to stable. However, it kept the ratings, both on foreign and domestic currencies, at the lowest investment level. Experts said this would have a beneficial impact on allocations of debt by foreign portfolio investors (REITs) to Indian papers.

“The decision to change the outlook to stable reflects Moody’s view that the downside risks associated with negative reactions between the real economy and the financial system are receding,” the rating agency said. .

Now, Moody’s and Standard & Poor’s have a stable outlook on their India ratings, while Fitch still has a negative outlook. The three rating agencies gave India the lowest investment rating.

Chief Economic Advisor Krishnamurthy Subramanian told Business Standard there was plenty of scope to further recalibrate Moody’s ratings with several reforms implemented in the financial sector and the outlook for the sector improving. “This (Moody’s stock) is a positive development that incorporates our consistent assessment of the strong fundamentals of the Indian economy,” he said.

The developments came in the wake of finance ministry officials who argued for a rating upgrade during a meeting with Moody’s on September 30. The agency has now partially accepted the request.

Moody’s said at the meeting that while India’s fiscal or financial strength, including its debt profile, has declined significantly, it has become less susceptible to event risk.

William Foster, vice chairman – Sovereign Risk Group at Moody’s, told a TV station that the outlook has changed to indicate that the economic recovery is taking hold. “The budget deficit and the debt burden remain challenges, but the big risk in the financial sector has stabilized,” he said.

In June of last year, Moody’s downgraded India’s sovereign rating one notch to the lowest investment rating and maintained the negative outlook. Foster said the negative outlook reflected many uncertainties due to the coronavirus and lockdowns.

On Tuesday, Moody’s said that with higher capital buffers and greater liquidity, banks and non-bank financial institutions pose much less risk to the sovereign than the agency previously predicted.

Although the risks associated with the high debt burden and low debt accessibility remain, Moody’s expects the economic environment to allow a gradual reduction in the general government budget deficit over the next few years, thus preventing a further deterioration of the sovereign credit profile.

Ranen Banerjee, leader of economic advisory services at PwC India, said Moody’s move is expected to lead to a higher allocation of debt by REITs to bonds in India. When it comes to the equity market, REITs don’t look at ratings. However, this would assure REITs that currency risks would ease now and it will have some effect on their allocations to equities in India, he said.

In Moody’s lexicon, India is rated Baa3. He said that maintaining ratings balances India’s main credit strengths, which include a large and diverse economy with high growth potential, a relatively strong external position and a stable domestic financing base for public debt, against its main credit challenges, including low per capita income. , high public debt, low debt accessibility and more limited government efficiency.

India’s long-term local currency (LC) cap remains unchanged at A2 and its long-term foreign currency (FC) cap remains unchanged at A3.

The four notch spread between the LC cap and the issuer’s rating reflects a limited political event risk that would significantly disrupt the economy and modest external imbalances, offset by a strong government footprint in the economy and limited predictability and reliability of government policies.

The one notch difference between the LC and FC ceiling reflects limited external indebtedness and the fact that, despite several forms of capital controls, a debt moratorium remains unlikely.

The rating agency said it could raise the ratings if India’s economic growth potential increases significantly beyond expectations, supported by the effective implementation of government economic and financial sector reforms that have led to a significant and sustained upturn in private sector investment.

This could lower the rating to junk if economic conditions are weaker than expected, indicating weaker growth over the medium term and a resurgence of financial sector risks.

The ICRIER think tank said that, given that ratings are lagged rather than leading indicators of economic performance, there is a need for authorities to be prepared to face the onslaught of external headwinds blowing on us, on the rise. from commodity prices, to fragile global supply chains, to weakening hyper-accommodative monetary policies in advanced economies and global contagion from the Evergrande debacle to name a few.

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