labels: moody's investor services, economy - general
Moody''s mood on India changesnews
Our Economic Bureau
23 January 2004

Hardly have the sounds of accolades showered on India at the World Economic Forum died down that we are showered with encomiums from another external quarter. International credit rating agency, Moody's Investors services, has upgraded India's foreign currency rating in two important categories from 'speculative' to 'investment' grade

India's country ceiling for foreign currency bonds as also the government's foreign currency issuer rating have been upgraded from Ba1 to Ba3 and with the Ba3 ratings the outlook for both the instruments look stable.

Moody's said the upgrade in the ratings was due to a reduction in external vulnerability, rising foreign investment, and vibrant economic growth.

These upgrades however, were due given the country's foreign exchange reserve position and the higher GDP growth figures.

Moody's has also revised upward its outlook on the Ba2 country ceiling for foreign currency bank deposits from negative to stable. The outlook on the Government's Ba2 domestic currency rating remains negative.

According to Moody's, the main motivation behind the rating changes is the reduction in external payments vulnerability. The country's foreign exchange reserves have risen to nearly $100 billion, a $30 billion rise in the year since these ratings were last raised. This amount is more than twice the value of the country's external obligations coming due over the next year and is also nearly large enough to cover a full year's current account payments.

In other words, the country's so called foreign debt servicing capacity is more than 1:2 for the existing debt obligations and beyond that there is adequate cover for any additional debts that may accrue in the next 12 months.

Moody's also mentions the country's resilient economic performance, during 2002 drought-induced shock when GDP growth nevertheless stayed above 4 per cent. Forecasts for the current year's expansion have been adjusted upward to 8 per cent.

In the future, while growth may be lower than that witnessed this year, it is likely to remain robust as the product of more than a decade of gradual structural reforms and market liberalisation.

Aside from the opportunities for outsourcing and software services in the small but growing information technology segment, the restructuring of private and some public industry, which has benefited from the lowering of import tariffs and restrictions as well as foreign resource transfers, is being recognised by investors worldwide.

Vigorous import demand is likely to shift the current account from a modest surplus position to small deficits in the next two years, although capital account surpluses are expected to exceed any such shortfalls and further bolster reserves, according to Moody's.

Given the scale of the foreign assets, the government's payments capacity should be able to withstand any foreseeable shocks or capital outflows emanating from the otherwise worrisome fiscal situation. In addition, the reserves cushion provides room for a gradual easing of foreign borrowing restrictions and other capital controls.

Moody's says that concrete progress on controlling India's fiscal deficit across all levels of government is still desirable in order to stabilise the government's domestic currency rating. Accordingly, the agency will watch for more ambitious implementation of public sector and labour market reforms following the upcoming national elections.

Moody's said the concrete progress on controlling the fiscal deficit across all levels is still desirable in order to stabilise the government's domestic currency rating. Accordingly, the agency will watch for more ambitious implementation of public sector and labour market reforms following the upcoming hustings.

The news of the upgrade came after the closure of trading hours but it is unlikely that there will be any significant change in the bonds and forex markets as the plus factors of the economy have by and large discounted by the markets.

Corporates however, can now source external commercial borrowings at finer rates, which will make them more competitive. The FDI and the capital markets are also now in a position to attract additional investments.

Commenting on the upgrades, Finance Minister Jaswant Singh said, "I have always held India as investment grade. This is not hyperbole but reality." On the impact of the upgrade he added, "This will help companies to raise funds at lower rates and therefore help the economy."


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Moody''s mood on India changes