Moody’s positive on India’s reform path, growth prospects

India got its first ‘positive’ rating outlook on Thursday. Global rating agency Moody’s changed its rating outlook for India to ‘positive’, with possibility of rating upgrade in the next 12-18 months. However, another rating agency Fitch kept the rating outlook at ‘stable.’

Both the agencies kept the sovereign rating unchanged. While Moody’s affirmed ‘Baa3’, Fitch maintained ‘BBB-’. Both these ratings are similar and indicates last investment grade. Foreign investors usually base their decisions on sovereign rating. It also helps the companies in raising money abroad.

Positive moves A statement issued by the rating agency said the decision to revise the ratings outlook to ‘positive’ from ‘stable’ is based on its view that there is an increasing probability that actions taken may strengthen the economy and, in turn, the sovereign’s financial strength over the coming years.

On its decision to revise the outlook, the agency said that India has grown faster than similarly rated peers over the last decade due to favourable demographics, economic diversity, as well as high savings and investment rates. “Moody’s expects these structural advantages, supported by relatively benign global commodity prices and liquidity conditions, will keep India’s growth higher than that of its peers over the rating horizon,” it said.

However, recurrent inflationary pressures, occasional balance of payments pressures, and an uncertain regulatory environment have contributed to periods of volatility in growth, and have exposed India to external and financial shocks, constraining its credit profile, it said.

Moody’s believes that the recent measures to address inflation, keep external balances in check, simplify the regulatory regime for investors, increase foreign direct investment, and facilitate infrastructure development will reduce some of India’s sovereign credit constraints.

Banking sector woes However, the agency cautioned about India’s weaker performance – relative to peers – on fiscal, inflation and infrastructure related metrics. While policies are beginning to address each of these factors, the extent of likely improvements is as yet unclear, it said adding the banking system’s asset quality, loan loss coverage, and capital ratios are relatively weak.

“This poses sovereign credit risks because of the banking sector’s role in financing growth as well the government’s deficits through its purchase of government securities, and the contingent liabilities due to the government’s ownership of a major portion of the banking sector. In the absence of any improvement in banking-system metrics over the coming months, India's sovereign credit profile will remain constrained,” it said.

Fitch view Fitch’s unchanged stance on outlook reflects the view that upside and downside risks to the ratings are balanced.