Global credit rating agency Moody’s Investors Service has said it could consider India for a rating upgrade given the improvement in macro-economic fundamentals. Speaking to BTVI , Moody’s Senior Vice-President Marie Diron says India’s government debt is slightly above 65 per cent of the GDP and its revenue base is relatively narrow, which may constrain the government’s possibility to offset any negative economic shocks. Moody’s also sees some uncertainties in the banking sector although the cleaning up of balance sheet is underway. The banking sector remains a source of effective contingent liability for the sovereign and that is something that is embedded in India’s sovereign ratings, she says. Moody’s expects next RBI Governor Urjit Patel to work with the Monetary Policy Committee (MPC) to enhance the transparency and predictability of monetary policy decisions, she says. Excerpts:

Moody’s recent report paints a positive picture of India. What is your view on growth and other macroeconomic scenario?

The report analyses India’s credit enhancement challenges. India’s rating is Baa3 with a positive outlook, which we have placed last year to highlight our perception that through economic, fiscal and monetary policies, India is gradually moving towards the most stable macroeconomic environment.

Now, looking at recent developments and its footsteps, we see that fiscal deficit and current-account deficits are moderating, along with a moderate inflation. That is really moving India towards the stable macroeconomic environment.

We have also seen the negative impact of lower-nominal GDP growth on corporate profits and household income of two years of bad monsoon and a tighter, although accommodative, monetary policy. We expect these two aspects to continue.

Corporate profit may remain constrained and that will probably have a negative impact on investment. This, along with further progress on reforms through various measures, will point towards an environment towards sustained growth and moderate inflation.

What’s your view on the new RBI Governor Urjit Patel?

From a sovereign credit profile perspective, we look at two sets of policies from the RBI and we expect continuity on those. One is monetary policy and delivery of moderate inflation. There are potentially upside risks to inflation in countries like India where half the (CPI) basket consists of food prices that are little predictable. But overall we expect moderate inflation to prevail in the next few years through a particular commitment by the RBI on delivering on its target.

The second set of policies is cleaning up the banks’ balance sheet, which has started. But it will continue for some time before we see revival in investment and bank lending. But we do expect further progress on that area, too.

As against the practices in the US, India has an obsession with individuals and we get to hear very little from other members of the RBI other than the Governor.

Have you had a chance to go through Patel’s writings, or know his thoughts?

We think that the changes in monetary policy that we seen in the last few years have really committed throughout the institution. And the RBI as a whole is working towards delivering a target that has confirmed recently at 4 per cent-plus or minus 2 percentage points. That is the overall framework that will guide the monetary policy.

The new Governor will work with the RBI as a whole and with the Monetary Policy Committee (MPC). And all of that should help in enhancing the transparency and predictability of monetary policy decision, which is an important element to ensure efficiency. So in general, we do not see any significant change in the way monetary policy is formulated in the next few years.

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