Worldwide rating agency Moody's has improved India's sovereign rating for the first time since 2004, citing state reforms to further enhance the economy's capacity to absorb shocks. "Coming on the back of significant improvement in the World Bank's ease of doing business index, this upgrade can also be expected to stimulate a more positive sentiment in the economy". Rupee, bonds and stocks rallied after the ratings upgrade. The one-level step-up from the lowest investment-grade ranking puts India in the league of Philippines and Italy. Moody's counted the GST, measures to address non-performing loans in the banking system, demonetisation, Aadhaar system of biometric accounts and targeted delivery of benefits through the Direct Benefit Transfer (DBT) as key reforms undertaken by the Modi government. "The economy is now going through a definite churn, and the rating upgrade augurs well for the country, the economy, and the business".
The upswing in the key indices came after the United States credit rating agency Moody's upgraded India's sovereign rating to Baa2 from its lowest investment grade of Baa, while changing the outlook for the country's rating to stable from positive, and said its was based on the Indian government's "wide-ranging programme of economic and institutional reforms".
And greater FDI inflow should lead to a lowering of the cost of capital.
The rating agency said recent reforms had reduced India's risk of sharp rise in debt, "even in potential downside scenario".
The move will also help improve availability and access to capital overseas for Indian companies, she added. New long-term investors such as pension funds will now start to invest in Indian bonds and existing long-term investors could increase the allocation to Indian bonds.
"Large number of reforms have happened in India in the last three years - economic, structural, and institutional". FICCI said that the government's approach towards reforms has been holistic. "We don't think the other two global rating agencies - Fitch and S&P - will follow-up in a hurry", said DBS Bank. This rating has a major impact on the bond markets. As and when the SBI's next review happens, we will also expect that State Bank gets a higher rating.
They said the Moody's upgrade was a shot in the arm because this would cheer up the mood of voters in Gujarat, a largely mercantile society.