Moody’s upgrades local currency debt rating outlook

Moody’s upgrades local currency debt rating outlook

Mumbai: Credit ratings firm Moody’s Investors Service on Tuesday changed its outlook on India’s Ba2 local currency rating to “positive" from “stable", acknowledging the resilience shown by the country to the global financial crisis that has sent bigger economies such as the US and the UK into a deep recession. The outlook upgrade is also indicative of the expectation that India will resume a high growth path with its “underlying credit metrics relatively intact".

Moody’s action comes after India’s $1.2 trillion (around Rs56 trillion) economy expanded 7.9% in the three months to September from a year earlier, the quickest pace in six quarters.

“The outlook revision implies that there is a scope for the local currency rating to be revised upward in the next 12-18 months," Moody’s sovereign analyst for India, Aninda Mitra, told Mint.

Moody’s ratings start at “C" through “Aaa" in ascending order. All ratings agencies have two national ratings: one a local currency rating and another for foreign currency. A Ba2 rating denotes a less-than-investment grade.

The agency also raised its ceiling on banks’ foreign currency deposits to Ba1 from Ba2 “to better reflect the robust external position of India", but kept unchanged its stable outlook on the foreign currency debt rating of Baa3, the lowest investment grade that the agency assigns.

The bond market remained unmoved after the revision, with the yield on the 10-year bond rising one basis point to 7.59% as current bond yields, according to dealers, have already factored in positive developments on the ratings and growth front.

Moody’s last rating action on India was on 22 January, 2004, when it upgraded the foreign currency ratings to Baa3 from Ba1. India’s foreign currency bond rating by the ratings firm is two rungs higher than that for local currency ratings.

“We are reconsidering now whether a two-notch rating gap is appropriate," Moody’s said in a statement, adding that a change in outlook paves the way for a possible narrowing of the gap between the local currency and the foreign currency bond ratings.

Two analysts pointed out that the action was a catch-up with other rating agencies that already have investment grade ratings on India’s local debt. Both Fitch Ratings and Standard & Poor’s have BBB- ratings on India, their lowest investment grade level.

“Despite India’s high fiscal deficit in FY10, the move can be interpreted as a signal that the credit agencies are hopeful of government reforms that would lead to marked fiscal consolidation," wrote Rohini Malkani and Anushka Shah, economists for CitigroupGlobal Markets (India), in a report.

In its statement, Moody’s said that the government’s ability to run strong counter-cyclical policies without damaging investor confidence or impairing fiscal sustainability is a supportive development and was an important criterion in considering a narrowing of the Indian government’s sovereign ratings gap with a positive outlook on the local currency rating.

The Rs3 trillion stimulus executed by the Union government and strong growth response have set the stage for a successful exit strategy for what has been an easy monetary policy, thereby leading potentially to a deceleration in India’s fiscal requirements, Moody’s said.

The ratings agency said it would wait for the nature and extent of the government’s fiscal consolidation programme to determine any near-term changes to sovereign ratings.

Bloomberg contributed to this story.