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Why Fitch, S&P may not follow Moody’s on India upgrade in a hurry

India now ranks a notch above the lowest investment grade cadre

Moody’s has upgraded India’s sovereign local and foreign rating to Baa2 from Baa3 (one notch above investment grade)

  • Institutional and economic reforms, particularly unveiling of the goods & services tax and bank recapitalization plan were seen as key strengths
  • We don’t think the other two global rating agencies – Fitch and S&P – will follow in a hurry

Moody’s upgraded India’s sovereign local and foreign rating to Baa2 from Baa3 (one notch higher investment grade) and changed the outlook on the rating to stable from positive. This is a welcome endorsement of the government’s ongoing reform agenda.

This follows Moody’s decision to put the economy on a positive outlook in April 2015. India now ranks a notch above the lowest investment grade cadre (see table).

The rating agency highlighted the economy’s various strengths:

  • Rollout of the goods and services tax (GST), formalizing the monetary policy framework, bank recapitalization, and other social sector changes (including Aadhar and the Direct Benefit Transfer (DBT), were highlighted as key examples.
  • Recent recapitalization plan for public sector banks and broader plans to resolve rising NPLs, including the Bankruptcy and Insolvency Act 2016 are seen as efforts to address one of the economy’s soft spots. Despite the small increase in the debt burden as a result (~0.8% of GDP), this is likely to be offset by an improvement in credit demand and better investment growth.
  • Beyond short-term disruption due to reforms like GST and demonetization, Moody’s remains confident that the economy has strong growth potential, with growth seen at 7.5% in FY19.
  • Debt levels are manageable: Despite the general government debt at a high of 68% of GDP in 2016 vs Baa median of 44%, this is mitigated by the large pool of private savings. Maturity of its debt stock has also lengthened and a majority is owed to domestic institutions and rupee-denominated. Near-term measures might raise the debt to GDP ratio to 69% due to slower nominal growth, but the trajectory was positive.

This rating upgrade comes at a time when implementation of reforms, a subdued rural sector and weak investment growth have slowed down economic growth. At the same time, a reversal in low oil prices has raised risks to the economy’s fiscal, inflation and current account dynamics. We don’t think the other two global rating agencies – Fitch and S&P– will follow-up in a hurry, based on their cautious rhetoric, mainly drawing attention to the weak fiscal (state and central government).

(Radhika Rao is India Economist with DBS Bank. Views are her own)

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