Moody's raises India’s credit rating outlook to ‘positive’

The Dollar Business Bureau Moody's Investors Service has on Thursday, affirmed the Government of India's credit rating outlook to ‘positive’ from ‘stable’. Moody's decision to revise the ratings is based on its view that there is an increasing probability that actions by policy makers will enhance the country's economic strength and, in turn, the sovereign's financial strength over coming years. 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. 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. Moody's believes that 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. Many of these measures are at relatively early stages of design and have yet to be implemented. According to Moody's, the ability of policymakers to strengthen India's sovereign credit profile to a level consistent with a higher rating will become apparent over the next 12-18 months. The report also mentioned that India's 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. Evidence over the coming months that policymakers are likely to be successful in their efforts to introduce growth-enhancing and growth-stabilizing economic and institutional reforms would lead to the rating being considered for an upgrade. On the other hand, the rating outlook would be revised to stable if economic, fiscal and institutional strengthening appeared unlikely, or banking system metrics remained weak or balance of payments risks rose, the report added.    

This article was published on April 9, 2015.