Acknowledging India's commitment to economic and fiscal reforms, global ratings agency Moody's on Monday upgraded its sovereign local currency from ‘Ba2' to ‘Ba1' which, though a notch below investment grade, is expected to improve the faith of investors in the country's economy.

However, the ratings agency retained India's foreign currency rating at the lowest investment grade ‘Baa3', saying the outlook on the local currency rating remained positive while the outlook on the foreign currency sovereign rating remained stable.

In a statement, explaining the reason for the one-notch upgrade, Moody's Vice-President and lead sovereign analyst for India, Aninda Mitra said: “The upgrade of the local currency sovereign rating to Ba1 was prompted by the Indian government's adoption of a medium-term (2010-15) fiscal consolidation strategy, which is supported by a broadening structural reform programme”.

Following the stimulus packages rolled out by the government to combat the slowdown in the wake of the global financial crisis, the country's fiscal deficit targets had gone off track and various ratings agencies had warned of downgrade in sovereign ratings.

In 2008-09, the Centre's fiscal deficit had ballooned to over 6 per cent and rose further to 6.5 per cent consequent to the stimulus measures, despite the FRBM (Fiscal Responsibility and Budget Management) Act being in place for a targeted fiscal consolidation programme. However, with a staggered stimulus exit strategy currently under implementation following a fast-paced economic recovery, the government has pegged fiscal deficit lower at 5.5 per cent for the current fiscal.

“Moody's will consider unifying India's local and foreign currency ratings at Baa3 should the track record of fiscal reforms deepen, and if — currently higher than usual — inflation pressures normalise,” the ratings agency said, while noting that these developments would underpin the government's structural reform programme and improve its local currency creditworthiness.

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