Moody’s Investor Services, a subsidiary of Moody’s Corporation, is a sovereign credit rating business. It provides international financial research on bonds issued by commercial and governmental entities. The company ranks the creditworthiness of borrowers, or in other words, the chances of getting back invested money in a certain institution, using a standardized rating scale which measures expected investor loss in the event of a default.
What do these ratings mean?
As far as the Moody's ratings are concerned, there are nine gradations of credit worthiness indicated by rating symbols. The symbols used are: Aaa, Aa, A, Baa, Ba, B, Caa, Ca and C, with Aaa having least credit risk (hence best place to invest foreign currency) and C representing the highest credit risk (means that the chances of getting back invested money is the least). India, now with Baa2 ranking, falls in moderate risk category with a stable outlook. According to Moody’s, India’s continues reform on economic and institutional front enhances high growth potential in the coming years. The up-gradation improving the credibility of India enables easy access to capital from abroad and also increase in inflow of capital with reasonable amount of surety.
What is the reason for India’s up-gradation in sovereign credit rating by Moody’s?
So why has Moody’s upgraded India’s sovereign credit rating after nearly 14 years, when it last did back in 2004 that too amid India’s current macroeconomic slowdown? Predictions say even though growth forecast for India is around 6.7% in 2017-18 to take into account the recent slowdown, the economy’s growth potential is strong and stronger than most peers (for example China) worldwide. Also, Moody’s expects India’s GDP growth to bounce back to 7.5% in 2018-19.
Moody’s also mentioned in a statement that it believes that recent reforms offer greater confidence that the high level of public indebtedness which is India’s principal credit weakness will remain much more stable, even in the event of shocks or bad news, and will ultimately decline.
There could be many more suggestive reasons for the up-gradation like the creation of the MPC or the Monetary Policy Committee – a 6 member panel to raise transparency in rate setting decisions of the Central Bank by forming the committee with 3 members from the RBI (including the Governor) and 3 members selected by the Government. This would enhance the confidence of any stakeholder or an interested party to invest because of the greater transparency and efficiency between the government and the central banking institution of the country. "On the fiscal front, efforts to improve transparency and accountability, including through adoption of a new Fiscal Responsibility and Budget Management (FRBM) Act, are expected to enhance India's fiscal policy framework and strengthen policy credibility," the agency mentioned in its reports. India’s constant effort to curb down non-performing assets through recapitalization of the Public Sector Banks and amending the Bankruptcy and Insolvency Act 2016 resulting an improvement on the fiscal front of the country.
India has also received the fastest growing economy tag in the world amid a failing global economy. India is also now the world’s second fastest growing services economy in the world. Information technology alone accounted for a whopping $108 billion worth of service exports back in the 2014-15, and this might prove to be a major source of motivation and reason for a greater positive outlook. Another reason for the positive outlook by Moody’s is the mass creation of bank accounts for one and all, basically for the poor across the country who didn’t have bank accounts yet, to create a space where all the money that is placed in can be accurately tracked and traced – hence a large amount of cash is now accounted for, that would otherwise ended up as black money.
What effects is this going to have?
Immediately after the recent upgrade of India’s rating by Moody’s from Baa3 to Baa2 on the 17th of November, 2017 – nearly 14 years after the last time it upgraded the rating for India back in 2004, equity markets have shown a positive uptrend and the markets are highly bullish. Top companies like HDFC Bank, Reliance Industries, SBI, BPCL, Indian Railway Finance Corporation (IRFC) were revised from Baa3 to Baa2 almost immediately.
Also, Sensex has touched 32,000 mark several times over the past few months and it’s even close to 33,500 as of November. This shows that over the past few months, the equity markets have shown promise and trust in the economic reforms that have been taking place and thus the improvement in ratings. After Moody’s upgrade, Indian Rupee jumped 61 paisa or 0.93 percent against USD to trade at 64.72.
This upgrade also will improve sentiments around ease of doing business within local and global investors within India. It will improve the foreign debt inflows and in turn strengthen the rupee in the market. “Long-term, India’s growth potential is significantly higher than most other Baa-rated sovereigns,” the agency has also mentioned in its reports.
What does this mean for Government and the country as a whole?
The GDP dropped down to 5.7 percent in April-June quarter from 7.9 percent a year ago this was due to the currency crunch, increase in unemployment among the daily-wage labourers, temporary or permanent studding down of small-scale and medium-scale industry, and so on in the economy. The government was criticised for the previously mentioned issues for enforcing demonetisation of Rs.500 and Rs.1000 in November 2017. Additionally, the chaotic rollout of the GST has further dampened the sentiment, promoting the government to make reforms on the taxes several times to cope up with rising criticism about the lack of employment creation and fears that India might just lose its fiscal deficit target.
Hence, with the ever-looming Gujarat Elections and the national elections which are just around the corner, Moody’s ratings has come to serve as a blessing for, both, the economy in terms of raising investor confidence in the Indian markets along with foreign investment opportunities bringing in foreign cash and as a boost to Modi’s image where, amidst allegations, his steps to reform the economy were highly supported and back up by such an authentic independent international rating agency. Experts are also in tandem with Moody’s claim that things in India look on the bright side in the coming mid-term future.
This has been a terrific upgrade for the morale of investors all around world, and even though we do not yet know how it is going to affect us in the future, but for now it certainly paints a pretty picture. For now, there has been a recent update only four days back on the 24th November 2017, where another of the world’s biggest credit rating agency has published its report in which it didn’t upgrade India’s ranking from what it was before and was a little more cautious in its outlook. Standard and Poor (S&P) has kept its rating unchanged at the lowest investment grade for the country, with a stable outlook, citing a sizable fiscal deficit, high general government debt and pretty low per capita income. This would come as a reality check amidst the news of Moody’s upgrading their credit rating, and it tells us that we shouldn’t really get carried away by Moody’s view of the economy.
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Picture Credits: Dailysabah.com
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