Moody’s Rating Upgrade: Will the improvement enhance economic growth of India?

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Moody's Investors Service is an international rating agency which enjoys high creditability with its rating to a country’s economy and can improve or deteriorate its growth prospects at Global front. Moody’s higher rating level of Baa2 awarded to India has been upgraded from Baa3. The Baa2 rating shows the improving business climate, enhancing productivity, stimulating foreign and domestic investment, fostering strong and sustainable growth in India. The upgradation to Baa2 from Baa3 by Moody’s has upgraded India's local and foreign currency issuer ratings and has changed the outlook on the rating to stable from positive. 

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Moody’s predicts India’s higher economic growth in 2018-19

  • Moody’s announced on Wednesday February 28, 2018 that Indian economy is starting to recover from the negative impact of demonetisation and disruption caused by GST roll out. – India’s GDP growth to go up at 7.6% for 2018.
  • Bank recapitalisation plan would also help credit growth over time
  • Moody’s has revised real GDP growth forecasts upwards also for the US, Japan, Germany, France, UK, South Korea, Russia, Saudi Arabia, South Africa and Turkey for 2018.
  • G20 economies will collectively grow 3.4% in 2018 and 3.2% in 2019, up from prior forecasts of 3.2% and 3.1%, respectively, Moody’s says.

Rating Upgraded after 13 years
The rating upgrade comes after a gap of 13 years - Moody's had last upgraded India's rating to 'Baa3' in 2004. 

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Impact of Moody’s Rating

  • The cost of international borrowing will now become cheaper for Indian government and Indian corporate
  • Moody’s rating will also improve the sentiment in the equity markets
  • The upgrade comes as a major boost to govt which has been under fire for the fallout of GST and demonetisation
  •  The rating agency has cited the government's implementation of its reform programme which includes introduction of the GST, Aadhaar system of biometric accounts and direct benefit transfer schemes and measures taken to address bad loans in the banking system
  • Moody’s rating reflects than international agencies have recognised that India is carrying out a vast range of institutional changes but has maintained great amount of fiscal discipline in the system
  • Demonetisation which has been facing severe criticism after most of the currency was returned to banks has also been viewed positively by Moody's.
  • Moody's Rating reflects that the reforms put in place have reduced the risk of a sharp increase in debt, even in potential downside scenarios.

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What made Moody’s to upgrade Rating of India?

Moody’s has upgraded the rating to Baa2 on the basis of key reforms implemented by India. While the government is mid-way through a wide-ranging program of economic and institutional reforms, number of important reforms have contributed to get Moody’s rating upgrade.  
 

According to Moody’s "Moody's believes that those implemented to date will advance the government's objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth.  The reform program will thus complement the existing shock-absorbance capacity provided by India's strong growth potential and improving global competitiveness."  

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Key elements which have contributed to improve Moody’s rating are:

  1. Goods and Services Tax (GST): It will, among other things, promote productivity by removing barriers to interstate trade;
  2. Monetary Policy Frame Work: Improvements to the monetary policy framework  by adopting a flexible inflation targeting regime and the formation of a Monetary Policy Committee (MPC) have enhanced the transparency and efficiency of monetary policy in India. Inflation has declined markedly and foreign exchange reserves have increased to all-time highs, creating significant policy buffers to absorb potential shocks
  3. NPA Management:Measures to address the overhang of non-performing loans (NPLs) in the banking system
  4. Demonetization
  5. Aadhaar system of biometric accounts and targeted delivery of benefits through the Direct Benefit Transfer (DBT) system intended to reduce informality in the economy
  6. Other important reforms and elements which are yet to yield result are planned land and labor market reforms, which rely to a great extent on cooperation with and between the States. 
  7. RERA Act is another major structural change which has contributed for Moody’s Rating upgradation
  8. Banks recapitalisation is also a very important step India has taken.

 

This upgrade would lead to investors realising that India is an attractive market. The direct investment should come back in a big way
 

Moody’s is of the view, "Most of these measures will take time for their impact to be seen, and some, such as the GST and demonetization, have undermined growth over the near term."

 

Moody's expects real GDP growth to moderate to 6.7% in the fiscal year ending in March 2018. Recent government measures to support SMEs and exporters with GST compliance, real GDP growth is expected to rise to 7.5% in FY2018. For longer term Moody’s expects that India's growth potential is significantly higher than most other Baa-rated sovereign countries... 

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