Rupee Cheers Moody's Upgrade With Mid-Day Surge

Moody’s raises India’s sovereign bond rating sees reforms fostering growth

MoodyÂ's Investors Service today upgraded India's sovereign credit rating by a notch to "Baa2" with a stable outlook citing improved growth prospects driven by economic and institutional reforms.

"Baa3" was the lowest rating in the investment grade - just a notch above the "junk" status.

"If you had to choose a time for an upgrade, then this was a singularly bad time where I think the uncertainties are actually high", said Pronab Sen, former chief statistician of India and a country director for think-tank International Growth Centre, who warns that between demonetisation and GST effects, the immediate prognosis for the economy is uncertain. This move is likely to be positive for both bond and currency markets, an HDFC Bank treasury report said.

"We believe that India would need not wait for 13 long years for the next upgrade as the government is firm and committed to adhere with the fiscal consolidation path", said the country's largest lender in its "Ecowrap".

The upgrade has not happened in isolation and for the last three years the India has been the fastest growing major economy, he added. "It is a belated recognition of the positive steps taken in the past few years".

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"We've not moved sufficiently enough and you still have the other two rating agencies, which still have you on BBB-", said R. Sivakumar, head of fixed income at Axis Mutual Fund.

Radhika Rao, an economist at DBS, said implementation of reforms, a subdued rural sector and weak investment have slowed economic growth while rising oil prices have raised the risks. In its biggest single-day surge in six weeks, the rupee gained 31 paise to end at a one-week high of 65.01 against the dollar. "Looks like sentiments are going to become positive".

In the case of HDFC Bank, the rating agency has also upgraded the bank's baseline credit assessment (BCA) and adjusted it to Baa2 from Baa3, it said.

Moody's said the recently-introduced goods and services tax (GST), a landmark reform that turned India's 29 states into a single customs union for the first time, will boost productivity by removing barriers to inter-state trade. "Moody's expects real GDP growth to moderate to 6.7% in the fiscal year ending in March 2018 (FY2017)", the agency said. It also claimed that India's growth potential superseded that of many other sovereign nations.

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