The rating upgrade by Moody’s will help Indian corporates to reduce their borrowing costs in the medium term as it will lower the risk premium for the companies. However, such impact may not be felt immediately.
“[The upgrade] is a huge positive...as it reduces borrowing costs for the government and will lead to lower credit risk premiums for corporates, leading to cheaper cost of capital,” said Chanda Kochhar, MD and CEO, ICICI Bank. Moody’s upgraded India’s rating to to Baa2 from Baa3.
The rating upgrade comes after a gap of almost 14 years, which many economists said was long overdue. Moody’s also upgraded the rating of Hindustan Petroleum Corporation’s (HPCL), a state-run oil marketing company, along with that for Bharat Petroleum and Indian Oil Corporation, to Baa2 from Baa3 with a stable outlook. HPCL said the firm would benefit from both lower borrowing costs and a stronger rupee.
“The ratings upgrade will definitely help in reducing our borrowing costs on one hand and the stronger rupee. Due to ratings upgrade will help in reducing our costs of crude oil imports on the other,” Mukesh Kumar Surana, chairman and managing director Hindustan Petroleum Corporation Limited told The Hindu.
However, an immediate reduction in borrowing costs may not be significant as Indian papers are trading one notch above the sovereign rating, as investors had already factored in a rating upgrade.
“We will have to see how the bond yields will move in the near term because the world market is choppy,” said Jayesh Mehta, country treasurer, BofAML. “Indian bonds were already trading one notch higher. Now, they will draw sustainable benefits. But the immediate benefits may not be that big.
“At the most, there may be around 5-10 basis points’ benefit,” he added.
Ms. Kocchar said the move will also help improve availability and access to overseas capital for Indian firms. “New long-term investors such as pension funds will now start to invest in Indian bonds and existing long-term investors could increase the allocation to Indian bonds. Thus, this measure will boost confidence, leading to higher capital flows and allocations.”
