Moody's asks India to reform to be eligible for rating upgrade

Credit rating agency Moody's Investors Service wants the Indian government to open up the economy further and ensure that key macroeconomic indicators like inflation remain under control over the next year, in order to be eligible for a rating upgrade.

Since 2004, Moody's has been maintaining India's credit rating at 'Baa3' with a positive outlook - the lowest investment grade, which is only a notch above 'junk' status.

With just a notch above junk status, Mood's has been keeping the Indian economy on tenterhooks with reform prescriptions for a more credit-positive sovereign rating.

"India's rating could be upgraded if Moody's expectations of gradual but credit positive reforms are realised in actual policy implementation and if the recent improvement in inflation, fiscal and current account ratios is sustained," it said.

Moody's said the positive outlook is based on the expectation of implemented policies, which are likely to lower sovereign credit risk by stabilising inflation, improving the regulatory environment, increasing infrastructure investment while maintaining the ongoing improvement in fiscal ratios.

"The rating could be upgraded if the above expectations are reflected in policy progress and macroeconomic indicators over the next year, and if we view this progress as sustainable," it said in a report on the Indian government.

It, however, cautioned that the rating outlook would likely return to stable "if there is a slowdown in or reversal of the policy reform process; if banking system metrics continue to weaken, or, if there is a decline in foreign exchange reserves coverage of external debt and imports".

Moody's attributed the improved macro-economic scenario to lower oil prices as well as tighter fiscal and monetary policies.

"As a commodity importer, India benefits from a low commodity price environment, and its reliance on domestic demand for GDP growth shields the economy somewhat from the subdued outlook for global growth," it said.