Moody's gives Modi a boost by raising India's sovereign bond rating

Moody’s Investors Service upgraded its ratings on India’s sovereign bonds for the first time in nearly 14 years on Friday, saying continued progress on economic and institutional reform will boost the country’s growth potential.

The agency said it was lifting India’s rating to Baa2 from Baa3 and changed its rating outlook to stable from positive as risks to India’s credit profile were broadly balanced.

Moody’s upgrade, its first since January 2004, moves India’s rating to the second-lowest level of investment grade. Standard & Poor’s has kept India at the lowest investment grade just above junk status for a decade and Fitch Ratings for one year longer.

The decision by Moody’s is a shot in the arm for Prime Minister Narendra Modi’s government and the reforms it has pushed through, and comes just weeks after the World Bank moved India up 30 places in its annual ease of doing business rankings.

All Indian markets including stocks, bonds and rupee rallied on the rating upgrade.

“It seems like Santa Claus has already opened his bag of goodies,” said Lakshmi Iyer, head of fixed income at Kotak Mutual Fund said.

“The move is overall positive for bonds which were caught in a negative spiral. This is a structural positive which would lead to easing in yields across tenors,” she said.

Last year, India lobbied hard with Moody’s for an upgrade, but failed. The agency raised doubts about the country’s debt levels and fragile banks, and declined to budge despite the government’s criticism of its rating methodology.

On Friday, the government cheered the upgrade as an endorsement of its reforms.

Modi’s top colleagues saw it as a further victory for the prime minister after US-based research agency Pew released a survey this week that showed nearly nine out of 10 Indians held a favourable opinion of him.

Not positive for all

But some economists said an upgrade from the other big rating agencies seemed unlikely.

Radhika Rao, an economist at DBS, said implementation of reforms, a subdued rural sector and weak investment have slowed economic growth while rising oil prices have raised the risks.

“We don’t think the other two global rating agencies – Fitch and S&P - will follow-up in a hurry, based on their cautious rhetoric,” she said, noting their concerns on “weak” state and central government finances.

At 0550 GMT, the benchmark 10-year bond yield was down 9 basis points at 6.97 percent, the rupee was trading stronger at 64.84 per dollar versus the previous close of 65.3250, while the NSE share index was 1.1 percent higher.

“We have been expecting it for a long time and this was long overdue and is very positive for the market,” said Sunil Sharma, chief investment officer with Sanctum Wealth Management. “Looks like sentiments are going to become positive.”

Moody’s said the recently-introduced goods and services tax (GST), a landmark reform that turned India’s 29 states into a single customs union for the first time, will boost productivity by removing barriers to inter-state trade.

Moody’s said it expects India’s real GDP growth to moderate to 6.7 percent in the fiscal year ending in March 2018 from 7.1 percent a year earlier.

The agency also raised India’s local currency senior unsecured debt rating to Baa2 from Baa3 and its short-term local currency rating to P-2 from P-3.

“Longer term, India’s growth potential is significantly higher than most other Baa-rated sovereigns,” said Moody‘s.