A week after Moody’s Investors Service upgraded India’s sovereign ratings, for the first time since 2004, all eyes are now on global rating agency Standard & Poor’s (S&P) review expected on Friday, a senior finance ministry official said here today.
“The S&P is coming out with its review, we are bracing for both a positive and a negative outcome of their assessment,” the official said.
In October, S&P had said that India needs to improve its fiscal position for a rating upgrade. With the government lowering Goods and Services Tax rate on a number of commodities and the recent reduction in excise duty on fuels, there are concerns of a slight slippage in meeting the fiscal deficit target of 3.2 per cent of Gross Domestic Product by March-end 2018. Finance Ministry officials, however, have maintained that the government is on course to meet the fiscal deficit aim.
An upgrade from S&P will be a positive for the bond market and likely reduce interest costs for both the government as well as companies raising funds from abroad. In October, S&P kept India’s sovereign rating unchanged at the lowest investment grade with a stable outlook. Since then the government has announced a recapitalization plan for the public sector banks and tried to ease the pain points in the GST rollout.
Moody’s upgraded India’s sovereign ratings to Baa2 from its lowest investment grade Baa3 citing the NDA government’s “wide-ranging program of economic and institutional reforms” among the reasons for the move. The ratings upgrade was accompanied by a change in the outlook for India’s rating to “stable” from “positive.” The markets including stocks, bonds and rupee had rallied on the upgrade.
Moody’s, however, warned that India’s rating could be downgraded if its fiscal metrics and the outlook for general government fiscal consolidation deteriorates materially. A sovereign ratings is reflective of a country’s risk profile and a ratings upgrade would enhance India’s position as an investment destination for foreign investors.
The upgrade came within weeks of a 30-place improvement in India’s ranking in World Bank’s ease of doing business ranking to 100th rank. India’s sovereign credit rating was last upgraded by Moody’s in January 2004 to Baa3 from Ba1. In 2015, it had changed rating outlook to “positive” from “stable.” Baa3 rating is just a notch above ‘junk’ status.
Moody’s had considered reforms including improvements to the monetary policy framework, steps to address the issue of non-performing loans in the banking system, and measures such as demonetisation, Aadhaar and the Direct Benefit Transfer system intended to reduce informality in the economy.
The agency also acknowledged the recently introduced Goods and Services Tax (GST), which among other things, will promote productivity by removing barriers to interstate trade, Moody’s had said. Moody’s is also of the view that recent reforms offer greater confidence that the high level of public indebtedness, which is India’s principal credit weakness, will remain stable, even in the event of shocks, and will ultimately decline.