Key Highlight:

  • Moody's upgraded India's rating to “Baa2” from “Baa3" 
  • India's GDP growth seen reaching at 7.5% in FY19
  • Moody's provide positive outlook for India ahead

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After jumping 30 spots and entering into the top 100 in the World Bank’s Ease of Doing Business global rankings for the first time, the next big thing for India was Moody's Investor Services up-gradation in ratings, indicating a positive long-term economic growth.

On November 17, Moody's upgraded India to “Baa2” from “Baa3” and changes its outlook to “Positive” from “Stable”.

This would India's first upgrade after thirteen years. Last time when India saw higher ratings was on January 2004.

What does an upgrade means?

Usually, a sovereign credit rating upgrade means that risks associated with a sovereign default have moderated. This leads to a decline in the risk free rate (i.e. government bond yields). And a lower risk free rate, in turn, would lead to a decline in borrowing costs for corporates.

When Moody's upgraded India's rating, the 10-year G-sec yield, which had increased by 30 basis points over the last 30 days, reacted favorably, opening 10 basis points lower at 6.96%, but lost the gains during the course of the day and closed at 7.05%, similar to 7.06% on the previous day. Even Indian rupee appreciated by 0.5% against US dollar on the same day.

What's ahead?

Firstly, the move has been taken as positive outlook for India's long-term economic growth.

Sahil Kapoor and Shobana Krishnan, Economists at Edelweiss Financial Services, said, “In this regard, change in outlook with an upgrade for India came in as a welcome. In their assessment, Moody’s has acknowledged reforms by the government and long run potential in the economy.”

However, analysts also believe that near-term concerns still continue to haunt India's growth.

Suvodeep Rakshit, Upasna Bhardwaj and Madhavi Arora, analysts at Kotak Institutional Equities, maintained a negative bias in the short run due to risks emanating from fiscal slippage, upward trending inflation trajectory, higher crude oil prices, end of rate cut cycle and tightening of domestic liquidity.

The trio of Kotak for fiscal target said, “We expect the government’s fiscal deficit in FY2018 at 3.5% as against the budgeted 3.2% given the downside risks on receipts specifically from lower RBI dividend, excise duty cut on petroleum products, and GST collections.”

Meanwhile, India's consumer price index (CPI) or retail inflation reached at seven-month high and came in at 3.58% in the month of October 2017 - higher from 3.28% in September 2017 but lower as against 4.20% in the similar month of the previous year. 

The Reserve Bank of India continued to fear that rising consumer prices will threaten the central bank's inflation target of 4% which led the monetary policy committee (MPC) to vote for status quo in the October 2017 policy.

RBI said that inflation is expected to rise from its current level and range between 4.2-4.6% in the second half of this year, including the house rent allowance by the Centre.

In regards to foreign flows and debt market, analysts at Kotak mentioned that there is currently limited room as the GSec limits are mostly utilized. However, positive sentiments may help in utilization of open SDL limits (Rs 25,200 crore) and the remaining general category limits in GSec (Rs 3,100 crore) and corporate bonds (Rs 4,000 crore).

However, continued FPI equity inflows will keep alive the risks of further OMO sales, implying higher supply pressure on bonds in the near term.

Meanwhile, Nikhil Gupta and Rahul Agrawal, analysts at Motilal Oswal, do not expect another upgrade from Moody's in near future for the country.

They said that since neither a sharp decline in general government debt nor a strong revival in investments is on the anvil, another upgrade not in near term. Instead, they believe since other rating agencies have not taken any rating action for more than a decade, it might be a time to revisit India’s sovereign ratings.