Global ratings agency Moody’s on Thursday reaffirmed India’s rating at Baa3 but raised the rating outlook to ‘Positive’ from ‘Stable’. India, however, remains at the last rung of investment grade by all agencies.
Moody’s is the first rating agency that has given India a positive outlook. The driver for the rating outlook change, said a Moody’s release, is its view that there is an increasing probability that actions by policy makers will enhance India's economic strength.
“India has grown faster than similarly rated peers over the last decade due to favourable demographics, economic diversity, as well as high savings and investment rates. Moody's expects these structural advantages, supported by relatively benign global commodity prices and liquidity conditions, will keep India's growth higher than that of its peers over the rating horizon,” said the release.
The rationale for affirming the Baa3 rating, it said, reflects India's weaker performance–relative to peers–on fiscal, inflation and infrastructure-related metrics. “While policies are beginning to address each of these factors, the extent of likely improvements is as yet unclear,” the release said.
Commenting on the development, Chief Economic Advisor Arvind Subramanian said that the upgrade validated the direction of the Modi Government’s reform programme and expressed hope for a bump-up in India’s rating as well. “It also confirms something that we have been saying for sometime now that the growth prospects and the macro-economic prospects for the economy are improving.”
He said that the focus of Government is on what is required to improve growth and that the inflation target of 5 per cent to 5.5 per cent year end will not be breached as the unseasonal rains that have resulted in crop damage will be a “temporary blip” on food prices.
The Moody’s release, however, said that a rating upgrade would be possible only if in the coming months evidences emerge that the efforts made to enhance growth and stabilise economic and institutional reforms are indeed succeeding. However, there will be a downgrade, it added, if economic, fiscal and institutional strengthening appeared unlikely, or banking system metrics remained weak or balance of payments risks rose.
