Moody’s ‘Surprise’ Upgrade Of India’s Rating May Not Be Immediately Followed By Other Rating Agencies


11/21/2017



India needs to keep a close watch on its fiscal health in order to brighten its chances of an upgrade from other global rating agencies even though the country has received a surprise upgrade from Moody’s last Friday, say analysts.
 
The second lowest level in the investment rating was granted to India by Moody’s which was the first that India received since January 2004. It has been about decade that rating agencies Standard & Poor's and Fitch have kept the third largest economy in Asia at the lowest investment grade level.
 
Three different analysis said that because of the fact that there are now questions about India’s fiscal health at present, the move by Moody's was actually surprising. In the present fiscal year, the new Goods and Services Tax and a ban on high-value notes has hit consumption and hence the gauge of the economic growth of the country has reached to a three year low at 5.7 percent. Therefore, many are surprised by the Moody’s move. 
 
"The timing of the upgrade is odd," Vishnu Varathan, Mizuho's head of economics and strategy, wrote in a note.
 
The central bank of India – the Reserve Bank, would have its hand tied due to creeping inflation and a pickup in global oil prices has also negatively impacted India’s fiscal deficit, he added. Varathan further said that the concerns about the government's finances and credit discipline are also compounded by the possibility of the central government choosing to waive more loans by farmers to gain political favor
 
Analysts therefore said that there would be no rush among the two other rating agencies Fitch and S&P to follow Moody’s move.
 
"The timing of (Moody's) announcement is a positive surprise," Nomura analysts wrote in a note. "The question now is whether or not S&P and Fitch follow. Our bias is that they will likely wait for the government's fiscal position to actually improve before making any changes."
 
The latest data by the central bank of the country shows that for the quarter that ended in June, the fiscal deficit of India has reached 2.4 percent of the country's gross domestic product and was at $14.3 billion which is a four-year high.
 
By the end of the fiscal year 2017/18 ending March 2018, India’s total fiscal deficit is expected to over the 3.2 percent of GDP target that has been set for the country, said Nomura analysts in the note
 
But explaining the reasons and logic behind its move to upgrade India’s credit ratings, Moody’s said that India will benefit from the reforms brought in by the government of Prime Minister Narendra Modi. The reforms have "reduced the risk of sharp increase in debt, even in potential downside scenarios" despite the fact that the debt of India's government is high — at about 68 percent of GDP whereas the median is 44 percent for countries of the same rating category.
 
Moody's assessment of India's outlook was agreed to by bank analysts. In the next fiscal, the fiscal deficit is likely to come down as the benefits of the government’s reforms pay off, said Nomura.
 
"In our view, Moody's upgrade confirms the positive direction of government reforms and their expected benefits over the medium term. These include implementation of the GST, bankruptcy reforms, infrastructure spending and the large-bank recapitalisation, among others," Nomura said.
 
(Source:www.cnbc.com)