The sovereign rating upgrade by global agency Moody’s has put India alongside Italy, Spain, Bulgaria and the Philippines in terms of investment climate. In effect, India has become the largest economy among Baa2-rated sovereigns, according to Moody’s.
The agency today upgraded India’s sovereign credit rating by a notch to ‘Baa2’ with stable outlook after a gap of 13 years, saying reforms will foster sustainable growth. Sovereign rating is issued to national governments and a barometer of the country’s investment climate. It gives investors insight into the level of risks, including political, associated with investing in a particular country. According to Moody’s, Baa rating is medium-grade and subject to moderate credit risk while the modifier 2 indicates a mid-range ranking.
The government and some commentators in India have been pitching hard for a rating upgrade citing the country’s strong economic fundamentals, political stability and a slew of reforms. Some of the key reforms that the Narendra Modi government has initiated include the Goods and Services Tax (GST), demonetisation, Aadhaar, bank recapitalisation, the Insolvency and Bankruptcy Code and targeted delivery of benefits through the Direct Benefit Transfer (DBT) system, among others.
The other two leading global rating organisations such as Fitch and S&P have BBB- rating with a stable outlook. BBB- is just a notch above the junk grade and the lowest in investment ratings. The upgrade signals increasing confidence in the Indian economy vis-a-vis China in the international market. In September, S&P Global Ratings cut China’s long-term sovereign credit rating by one level to ‘A+’ from ‘AA-‘.
Even Moody’s in May this year downgraded China to A1 from Aa3 and changed outlook to stable from negative. After Moody’s action, India is now three notches away from China. With Baa2 and a stable outlook, India is behind only China in the BRICS bloc, Moody’s said, adding that India, China and South Africa are investment grade sovereigns in the grouping. Russia has a Ba1 rating, South Africa (Baa3) and Brazil (Ba2). Foreign investors are expected to see the current action by Moody’s as another evidence of a growing Indian economy.
A rating upgrade usually gives a leg-up to the economy, prompting companies to expand capacity in the country, which also generates more jobs. This is also viewed as a positive sign by investors in stocks, bonds and currency markets, sparking more capital inflows. The factors that rating agencies normally consider while deciding on sovereign ratings include FDI inflows, debt-to- GDP ratio and per capita income of nations, among others.
According to Moody’s, the average fiscal deficit of the other Baa2-rated countries was 4.2 per cent in 2016 and 3.1 per cent in 2017 (forecast). The “median debt:GDP ratio for Baa2 countries as against India’s debt:GDP ratio stood at 42.7294 : 68.9645,” Moody’s said. Moreover, on a PPP basis, India’s GDP per capita has outstripped the Baa-rated median for 19 countries. Between 2006 and 2016, this grew by 108 per cent against 74 per cent for all Baa-rated medians, it added.
