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Moody’s Rating & the Surge of Indian Economy

Moody’s, the international agency rating the credit worthiness of sovereign nations, upgraded India’s outlook from ‘stable’ to ‘positive’ on April 9, 2015 while appreciating the recent policy measures taken by the government. However, the Baa3 rating accredited to India was not changed. Moody’s in its statement said that it could upgrade India’s rating in the next 12-18 months if the policy measures announced by the government succeed in propelling the higher economic growth rate. Prior to the Moody’s announcement, the International Monetary Fund (IMF) too projected that India will overtake China as the fastest growing emerging economy in 2015-16 by clocking a growth rate of 7.5 per cent, helped by its recent policy initiatives, pick-up in investments and lower oil prices. World Bank too had forecasted similar GDP growth outlook for India for the current fiscal year.

Credit Ratings & Their Impact

Credit rating agencies like Standard and Poor, Fitch and Moody’s etc rate all the countries of the world according to their credit worthiness. These ratings help the investors to prioritize their investment in foreign countries in accordance with the risk attached to the capital and expected returns on their investment. In other words, these rating presents an idea about the prevailing invest climate in a particular country. However, there are several other factors upon which the flow of funds to a particular country depends. For instance, in a country like Afghanistan, even if favourable policies are made to attract the investment, if the security scenario remains fragile, investment flows into the country would remain low despite a favourable credit rating.

Ratings and Indian Growth Scenario

In the backdrop of reform initiatives undertaken by the Government of India, Moody’s upgraded the outlook for India from stable to positive thus giving a hint to the investors about the increased growth rate of Indian economy in coming days. The high saving and investment rate, economic diversity and favourable demographics were important factors behind the faster growth of Indian economy during the past decade.

But inflationary pressures, occasional balance of payments pressures, and an uncertain regulatory environment had caused occasional volatility which derailed the growth process. These factors were mainly responsible lower grade investment rating by the credit rating agencies.

As per the Moody’s statement, current challenges which India had to address are on fiscal, inflation and infrastructure fronts. Also, India's banking system's asset quality, loan loss coverage and capital ratios are relatively weak. This poses sovereign credit risks because of the banks play most important role in financing growth. In the absence of any improvement in banking-system metrics over the coming months, India's sovereign credit profile will remain constrained.

Important economic fundamentals of Indian economy found by the Moody’s are as under –
•    GDP per Capita (PPP basis) – USD 5,777 (2014)
•    Real GDP growth – 7.4 % (2014-15)
•    Inflation Rate (On the basis of Consumer Price Index) – 4.3 % (December 2014)
•    Fiscal Deficit – 6.9 % (2014-15)
•    Current Account Deficit (As percentage of GDP) - 1.1% (2014-15)
•    External Debt (As percentage of GDP)  - 22.8% (2014-15)
•    Level of economic development: High level of economic resilience
•    Default history: No default events (on bonds or loans) have been recorded since 1983.  

In the coming months, if policymakers remain successful in their efforts to introduce growth-enhancing and growth-stabilizing economic and institutional reforms, in most likelihood, the rating would be upgraded; however, on the contrary, if government failed to strengthen fiscal and banking institutions, rating could be downgraded as well.

However, most analysts feel that high growth rate is likely in the coming months as currently there is lower inflation, oil prices are also on lower trajectory and some major reforms are also on the anvil. Thus current economic fundamentals are strong enough to give a positive outlook for the growth story in coming months.

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