New Delhi/Mumbai: Credit rating agency Moody’s on Wednesday upgraded its ratings on Indian long- and short-term government bonds to “investment” grade from “speculative”, holding that the country’s diverse sources of economic growth have enhanced its resilience to global shocks.
The move is expected to lead to higher fund flows into the country and reduce the cost of overseas borrowing for Indian companies.
“While India is and will remain primarily a domestic demand-driven economy, the growth, product mix and destinations of Indian exports reflect improved international competitiveness, another source of economic resilience,” the agency said in a statement.
The agency unified India’s foreign and local currency government bond ratings at Baa3 in accordance with its Rating Implementation Guidance, “which states that Moody’s will maintain a gap between a government’s domestic and foreign currency debt ratings infrequently and only in compelling cases”.
“The guidance was based on an analysis of the last two decades of sovereign defaults, which does not offer empirical justification for a rating bias in favour of either local currency or foreign currency government debt,” it added.
The previous time Moody’s upgraded any Indian long-term sovereign debt instrument from “speculative” to “investment” grade was in 2004, the finance ministry said in a statement.
Thomas Mathew, joint secretary, capital markets, in the finance ministry, said the upgrade “will encourage foreign institutional investors (FIIs) to look at India as a favourable investment destination”.
He added that Moody’s action will “make other rating agencies take a fresh look at the methodology they use for India”.
The Indian government is interacting with rating agencies to impress upon them the long-term structural strengths and sound fundamentals of the Indian economy, the finance ministry said in a statement.
BSE’s benchmark index, the Sensex, gained 3.4% to close at 15,685.21 points on Wednesday, its highest close since 29 August and ending a five-day losing streak. The rupee ended at 52.49 to the dollar, 0.7% stronger from Tuesday’s close. The yield on the 10-year bond rose to close at 8.34%, from 8.28% on Tuesday, on profit-booking by traders.
Devendra Dash, a senior dealer with Development Credit Bank Ltd, said the rating upgrade will come in handy if the government increases the FII limit for dealing in bonds. “The FII limit in bonds has already been utilized, and unless they increase the limit, there is no use of this rating. Maybe the government will increase the limit further in the coming days since we need dollars desperately,” he said.
A finance ministry official, speaking on condition of anonymity and without revealing details, said the ministry is looking at more measures to encourage capital flows. The government allows $15 billion FII investment in government bonds and $20 billion in corporate bonds.
Harihar Krishnamurthy, head of treasury at FirstRand Bank, however, said the upgrade will not make for any immediate difference for investors. “Country ratings now have become a more sensitive concern for overseas investors than instrument ratings.”
Moody’s cited India’s economic size, growth potential and structural diversity as credit strengths, but cautioned that the relatively high government deficit and debt levels and low tax revenues were constraints on the rating.
“High growth and revenue improvements have not been able to bring debt ratios down significantly in the past,” it said.
Risks from high public debt, however, are mitigated by factors such as the long-term nature of debt maturity period and robust private sector savings, Moody’s said.
“The domestic savings rate of over 30% of GDP is able to absorb annual debt issuance to the tune of 7-10% of GDP. This pool of domestic investors is not available in countries that lack high domestic savings or where households prefer to invest in assets other than their government’s debt,” it said.
Moody’s said India’s economic growth may fall below below 7% this fiscal year due to an uncertain global funding environment, high domestic interest rates and “the apparent lack of policy initiatives that can revive business confidence”.
But it also said the cyclical dip could reverse some time in 2012-13 as inflation cools from the current 9% levels, allowing for a gradual reversal of 2011’s tight monetary policy stance by the central bank.
The Reserve Bank of India has increased its policy rates 13 times since March 2010. It indicated in its mid-quarter policy review last week that it will henceforth follow the path of a policy reversal without saying when this will begin.
Moody’s said that while the rupee’s depreciation of 20% against the dollar in the past three months poses micro risks to individual importers and unhedged foreign borrowers, it does not pose a sovereign or country risk given the still relatively low openness of the economy and the fact that the government itself has very small foreign repayments.
Reuters contributed to this story.