Thursday, December 22, 2011

Moody's upgrades India's Sovereign Debt Ratings

Upbeat finance ministry to announce supporting measures for boosting foreign investment by December-end.

At a time when sluggish growth and impending slippage in fiscal deficit target, intertwined with an atmosphere of policy paralysis, has been dampening economic spirits across the board, Moody’s on Wednesday changed the sentiment in India by upgrading the country’s sovereign debt ratings from speculative to investment grade.

The upgrade immediately injected adrenaline into the government machinery, especially the finance ministry.

Officials, now brimming with optimism over the shift in the foreign investors’ outlook for the country, have indicated announcement of steps soon after the close of the ongoing Parliament session — in the government’s efforts to boost foreign investment in the country.

INDIA’S REPORT CARD What rating agencies say about the nation
 Foreign currency long-term debtLocal currency long-term debt
DBRSBBB (low) stableBBB (low) stable
Moody’sBaa3 (investment grade)Baa3 (investment grade)
FitchBBB- (stable outlook)BBB- (stable outlook)
S&PBBB- (stable)BBB- (stable)
Source: Rating agencies

The measures likely to be announced by December-end include relaxation in the lock-in and residual maturity norms for investments in the infrastructure sector, according to an official. “Also, there can be a hike in investment caps, wherever necessary.”

The lock-in period and the residual maturity are expected to be reduced to one year for all infrastructure investments.

The government says this will enthuse FIIs to look at India as an attractive investment destination. “The upgrade will have an amazing effect on sentiments in the short term,” says Thomas Mathew, joint secretary, capital markets.

Moody’s Investor Service upgraded the rating on long-term government bonds denominated in domestic currency and long-term country ceiling on foreign currency bank deposits, both, from Ba1 to Baa3 — speculative to investment grade. 

Year 2004 was the last time Moody’s upgraded any Indian long-term sovereign debt instrument from speculative to investment grade.

In addition, the rating agency has also upgraded the short-term government bonds denominated in domestic currency from NP to P-3, again from speculative to investment grade. The rating has been upgraded in this case for the first time since it was assigned in 1998.

The upgrade follows a meeting last month between the representatives of the rating agency and finance ministry officials. The officials, led by R Gopalan, secretary to the department of economic affairs, impressed upon Moody’s to upgrade the country’s rating to Baa1 — two notches above its current rating.

The ministry, under a planned strategy for strongly presenting the India growth story and seeking better ratings, provided a detailed, data-based “India factsheet”, wealth in the public sector undertakings, and a cross-country comparison of long-term economic, fiscal and financial indicators to the rating agency.

Says an official, who was part of the presentation process: “We told them to analyse their India ratings in the last two decades and the country’s performance during the period and showed them that they didn’t match. 

Despite problems, India growth story has remained intact since 1991.”
Mathew says the government will ask for similar upgrades from other rating agencies now. “Moody’s should revise its ratings further two notches upwards,” he adds.

Moody’s has now recognised that the “diverse sources of Indian growth” have “enhanced its resilience to global shocks”. The present slowdown in growth rates “could reverse some time in financial year 2012-13, as inflation cools from current 9 per cent levels”, it says in its report. The structural drivers of India’s growth momentum will not be damaged by the present cyclical downturn, it says
Moody’s also expect that growth, supported by savings and investments, will revive over the medium term. “In terms of economic size, diversity, growth as well as saving and investment rates, India is stronger that baa3 rated peers,” it notes.

The rating agency has, however, pointed out that India’s weak “fiscal metrics” remained a constraint for the nation’s rating as government debt levels were higher than similarly rated nations.

“Improvement in government finances, coupled with enhancements to the investment climate and a reduction in infrastructure bottlenecks, could lead to the rating being considered for an upgrade from current levels,” said the agency in its report.

Still, a sustained rise in debt or “continued worsening of the balance of payments well beyond the period of current global uncertainty could trigger a downgrade”.


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