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    Moody's upgrades India's ratings outlook after nearly two years to Stable from Negative

    Synopsis

    In November 2019 Moody’s had downgraded India’s sovereign rating by a notch to Baa3 from Baa2 with a negative outlook over a weak reform push contributing to a prolonged period of slow growth that it expected to continue beyond the Covid-19 pandemic.

    Moody'sAgencies
    Moody's affirmed Baa3 rating to foreign-currency and local-currency long-term issuer rating and local-currency senior unsecured rating. Moody's has also affirmed India's other short-term local currency rating at P-3.
    Moody’s Investors Service raised the outlook on India’s sovereign rating to ‘stable’ from ‘negative’ in a revision after nearly two years, eliminating the chances of a downgrade to junk status.

    The global rating agency cited receding financial sector risks, a broadening economic recovery, and rising vaccinations reducing the downside risks to growth from subsequent coronavirus infection waves in support of the upgrade. “An economic recovery is underway with activity picking up and broadening across sectors,” it said.

    Moody’s has a Baa3 long-term rating for India, the lowest investment grade rating.

    The government termed the move as a positive development, which recognised the measures undertaken. “This is a positive development, given that they had especially mentioned that negative risks from the financial sector to the real economy have been mitigated,” chief economic advisor KV Subramanian told ET.

    He said this was the most important aspect as, even before the pandemic, it was the financial sector that had dragged down growth.

    “Reforms that we have done in the financial sector and the way the financial sector itself responded… non-performing assets have declined significantly, profitability improved for the first time in five years and provision coverage and equity capital we did,” he said. “With all that, prospects for further calibration (in rating) are there.”

    Moody’s upgrades India rating outlook to stable from negative; GDP can surpass 2019 level, says William Foster

    Moody's Investors Service has changed the outlook on the government of India's ratings to stable from negative. Watch William Foster, Vice President - Sovereign Risk Group of Moody's Investors Service in conversation with ET NOW's Ruchi Bhatia.

    “A decision to upgrade India’s sovereign rating would be driven by, among other factors, its economic growth potential increasing materially beyond our expectations, supported by effective implementation of government economic and financial sector reforms leading to a significant and sustained pickup in private sector investment,” William Foster, Vice President - Sovereign Risk Group, Moody’s Investors Service, told ET.

    “Effective implementation of fiscal policy measures that resulted in a sustained decline in the government’s debt burden and improvements in debt affordability would also support the credit profile,” he said.

    In June 2020, Moody’s had downgraded India’s sovereign rating outlook by a notch to Baa3 from Baa2 with a negative outlook over what it said was a weak reform push contributing to a prolonged period of slow growth. Outlook on the rating was downgraded in November 2019 to negative.

    In the latest outlook, Moody’s expects the economic environment to allow a gradual reduction in the general government fiscal deficit over the next few years, preventing further deterioration of the sovereign credit profile, even as risks stemming from a high debt burden and weak debt affordability remain.

    The agency said downside risks to growth from subsequent coronavirus infection waves are mitigated by rising vaccination rates and more selective use of restrictions on economic activity, as seen during the second wave.

    “Following a deep contraction of 7.3% in fiscal 2020 (ending March 2021), Moody's expects India's real GDP to surpass 2019 levels this fiscal year, rebounding to a growth rate of 9.3%, followed by 7.9% in fiscal 2022,” it said on the growth outlook.

    Rating Rationale
    India has become less susceptible to event risks, Moody’s said.

    “Risks that a negative feedback loop between the financial sector and real economy have receded, resulting in lower susceptibility to event risk,” the agency said.

    HDFC Bank chief economist Abheek Barua said, “India's internal and external balances look healthy and improving despite the extraordinary circumstances of Covid. Aggressive reforms have also helped in improving perception.”

    With higher capital cushions and greater liquidity, banks and non-bank financial institutions posed far less risk to the sovereign than previously anticipated, it said.

    The agency said solvency in the financial system had strengthened, improving credit conditions that are expected to be sustained as policy settings normalise.

    Bank provisioning has allowed for the gradual write-off of legacy problem assets over the past few years, it said.

    “In addition, banks had strengthened their capital positions, pointing to a stronger outlook for credit growth to support the economy,” Moody’s said.

    The repeal of the retrospective tax, steady progress on privatisation, launch of the national asset monetisation program and the uncompromising stance on agricultural policy changes indicate strong determination on part of the government to reinvigorate reforms, the Indian Council for Research on International Economic Relations said.

    The agency had upgraded India in 2017 after 14 years, endorsing the policy change agenda of the Narendra Modi government, before the downgrade in November 2019.


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    ( Originally published on Oct 05, 2021 )
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