India has, for the time being, staved off being relegated to junk bond status. International credit rating agency Moody’s has reaffirmed India’s rating at ‘Baa3’ and the outlook as stable. This rating is last investment grade and equivalent to S&P’s and Fitch’s ‘BBB(-)’.
This positive development comes after two other rating agencies — S&P (Standard and Poor’s) and Fitch — warned of a possible rating downgrade. The decision comes one-and-a-half months after meetings between top Ministry officials and Moody’s.
The agency has reported that India's susceptibility to event risk is assessed as low. A growth downturn is under way and will be exacerbated by slower global growth.
This will keep the Government’s deficit and gross borrowing requirement high but the financing risk is mitigated by the relatively robust domestic savings rate, it said.
Positive measures
It also said that although global trade and capital market conditions may result in currency and balance of payments volatility, relative exchange rate flexibility and adequate foreign exchange reserves buffer the macro-economic risks such volatility would otherwise pose.
However, this reaffirmation comes with a caution. “Fiscal data available thus far suggest that meeting the deficit will present a challenge,” Moody’s notes.
The Central Government’s fiscal deficit was 5.9 per cent in FY 2011-12, and the revised target for 2012-13 is 5.3 per cent of GDP. However, dampened growth has reduced the government’s tax revenues, while high commodity prices have raised its subsidy bill, it added.
Meanwhile, the rating agency patted the Government on the back on various counts. “In recent months, the government has adopted several measures to boost sentiment and investment. It relaxed rules on overseas borrowing to stimulate infrastructure investment, raised fuel prices as a measure to curtail its subsidy bill, approved a debt restructuring package to revive the power sector and allowed increased foreign direct investment in sectors such as insurance, retail and airlines, among others,” the agency said.
The agency also appreciated the fact that the Government survived even after the TMC’s exit.
Moreover, the possibility that recent reforms would survive political opposition was furthered when the ruling coalition won a symbolic yet important parliamentary vote on its retail FDI measure, it said.
Pushing change
According to the rating agency, the expectation that the Government will continue to push through long-pending policy changes was supported when the Cabinet approved a draft land acquisition Bill in December.
In another effort to shore up sentiment, the government also recently delayed by two years the implementation of a tax policy known as the ‘General Anti-Avoidance Rules’, which had been poorly received by investors, it added.