Moody’s ups India’s rating to highest since 1991 reforms

Moody’s ups India’s rating to highest since 1991 economic reforms

Global ratings agency Moody’s revised the country’s sovereign ranking to Baa2 from Baa3 – its first upgrade in almost 14 years — citing implementation of a string of economic reforms, including demonetisation and rollout of the goods and services tax. The new rating, India’s highest since the 1991 reforms, comes as a huge boost for the government.

Moody’sThe action looks beyond the present slowdown in economic growth and a surge in bank bad loans, and bets on India’s medium- and longterm growth potential.

The markets cheered, with the rupee, bonds and equities all reacting positively. Although the rupee and the sensex gained over 1% intraday, both retracted some of their gains toward the close. The move comes close on the heels of the sharp improvement in India’s ranking in the World Bank’s ease of doing business survey.

Moody’s gives govt ammo to battle oppn

The ratings upgrade by Moody’s could position India as an attractive investment destination, apart from making it easier for companies to raise resources abroad. The ratings agency highlighted reforms such as the Goods and Services Tax (GST) and demonetisation, which it said would lead to greater formalisation of the economy. Besides upgrading India’s ratings, Moody’s also revised the outlook from positive to stable, indicating that the next upgrade might take a while coming.

“The government is midway through a wide-ranging programme of economic and institutional reforms. While a number of important reforms remain at the design phase, Moody’s believes that those implemented to date will advance the government’s objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth,” the agency said.

The ratings action comes days ahead of the crucial Gujarat assembly elections where the opposition Congress has sought to portray GST and demonetisation as triggers for the slowdown. The Moody’s upgrade is expected to provide ammunition to the government to blunt criticisim about its handling of the economy after growth slowed to a three-year low of 5.7% in the June quarter and rollout issues linked to GST triggered a political backlash.

Industry, stock brokers and bankers said the revised rating would accelerate fund flow to the country. “This move will now give India access to cheaper capital funds for investment, helping accelerate growth,” said Shikha Sharma, MD & CEO, Axis Bank. So far India’s cohorts in the rating table were countries like South Africa and Indonesia. With this upgrade, India has moved into the same league as Italy, Spain, Oman and the Philippines.

Moody’s Upgrade Lifts Mood On D-St & Main St

Sensex Rallies Over 400 Pts Intra-Day

The sensex started the session almost at the day’s high, rallied over 400 points (1.2%) to an intraday high at 33,521. But, due to weekend profit-taking, it closed 236 points higher at 33,343. Market players interpreted Moody’s decision as an approval by the ratings major’s for the Narendra Modiled government’s reforms-oriented initiatives, which would put the country back on a strong economic growth path. The day’s rally added about Rs 1.7 lakh crore to investors’ wealth with the BSE’s market capitalisation now just a tad above the Rs 150-lakh-crore mark.

A section of the market believes that the Moody’s action has helped changed the mood on Dalal Street, but its impact would not last long. Jimeet Modi, founder & CEO, Samco Securities said that although Moody’s upgrade has helped a pull-back in the benchmark indices, this would prove to be short-lived as economic fundamentals have not changed. “China’s substantial reduction of rating from Aa3 to A1 did not lead to a fall in the markets. On the contrary, the stock market rose 20% since the downgrade. Therefore, the current upgrade should not be read into too much, it is merely a short-term sentiment booster,” Modi said.

Riding on reforms, govt cracked the code

‘Action Should Have Come A Year Earlier’

Several key serving and former policymakers said the upgrade should have been announced one year ago given the spate of reforms. “They always said they would like the reforms to take deep roots and the reforms are sustainable. From the department of economic affairs (DEA) we had written a letter pointing out what we considered as deficiencies in their rating methodology. They had of course replied,” former economic affairs secretary Shaktikanta Das who had spearheaded the effort told TOI.

“But the fact that reforms are deep rooted and sustainable are also a matter of subjective assessment. Now, subjective assessments can vary but at the same time our point was that subjective assessments are based on objective facts. Therefore, we felt India deserved a credit rating upgrade much earlier. It has to be recognised that without this rating upgrade India was attracting a lot of investments. Now with this upgrade, together with improved ease of doing business, India emerges as a very attractive destination,” said Das.

The 2016-17 economic survey had also questioned the rating methodology of the agencies and used the rating of China and India to point out the flaws. While it was pointing out the gaps, North Block mandarins, such as Das and CEA Arvind Subramanian realized that trying too hard with the agencies may not work and instead it is better to focus on the job at hand. “We do what we do,” Subramanian was overheard telling his colleagues in the finance ministry in the afternoon, in what was probably a take on Raghuram Rajan’s latest book ‘I do what I do’.

Former NITI Aayog vice chairman Arvind Panagariya pointed to flawed methodology that rating agencies pursue. “Of course, our ratings continue to be well below what they ought to be. We have no record of ever defaulting and we are among the fastest growing large economies. But the ratings agencies seem to attach a huge negative weight to our low level of percapital income,” he said.

“Nevertheless, while we must rejoice the rare event, we must also reaffirm our resolve to continue moving ahead with reforms to create the New India that the PM envisages by 2022,” Panagariya said. Economic affairs secretary Subhas Chandra Garg said the upgrade is a credible stamp of approval of deep and comprehensive structural reforms undertaken by the government to put India on a sustainable high growth and institutional development path.

N K Singh, a former civil servant and a member of the now-wound up Planning Commission, echoed the sentiment. “It is a very strong vindication going beyond recognition of the government’s overall economic strategy. This is not the result of a single measure but a constellation of measures which includes continued fiscal consolidation, convergence of fiscal and monetary policies, and continuous fine tuning of GST.”

International borrowings to be cheaper for India Industries

“Usually, rating upgrades are anticipated 30-60 days in advance and the effect of the change lingers on till 30-60 days after the event. However, in the current case, as the change in ratings by Moody’s was completely unanticipated, the decrease in yields might materialise in a short duration,” said HDFC Bank chief economist Abheek Barua.

In its earlier rating of Baa3, India’s peers included South Africa, Hungary, Indonesia, Kazakhstan and Romania. The borrowing costs for these companies ranged between 4.3% and 9.3%. The cohorts under the new rating of Baa2 include Spain, Italy, Philippines and Oman. The borrowing costs for these countries range from 1.5% to 4.9%.

Bank of America president and India country head Kaku Nakhate said, “This ratings upgrade will help India Inc’s future external borrowings becoming cheaper, which in turn will lead to higher investments in manufacturing and infrastructure sector.” Following the ratings upgrade, prices of bonds issued by Indian corporates rose in the international markets.

‘Upgrade shows reforms may boost growth’

Moody’s Investors Service vice-president (sovereign risk group) William Foster explains to TOI the rationale behind the ratings upgrade. Foster also sounds upbeat about India’s prospects, although he says the fiscal deficit could be wider than expected this year. Excerpts:

William Foster

VP (SOVEREIGN RISK GROUP), MOODY’S

What prompted the ratings upgrade?

How do you expect growth to pan out?

Longer term, India’s growth potential is significantly higher than most other Baa-rated sovereigns. The reforms — aimed at improving the business environment, increasing formalisation of the economy or anchoring stable inflation — contribute to further enhancing the economy’s capacity to absorb shocks. We have revised our GDP growth forecast down to take into account the immediate impact of demonetisation and disruptions related to GST. We forecast real GDP growth to moderate to 6.7% in the year ending in March 2018. However, as disruption fades, we expect to see a rebound growth to 7.5% in the next fiscal year.

Will the reforms undertaken by the government be enough to tackle the problem in the banking sector and revive growth?

The recapitalisation of public sector banks announced last month should enable them to move forward with the resolution of NPLs (non-performing loans) through comprehensive write-downs of impaired loans and increase lending gradually. This represents a step forward in addressing a key weakness in India’s credit profile. Over the medium term, if met by rising demand for investment and loans, the measures will help foster more robust growth, in turn supporting fiscal consolidation.

When do you expect private sector investments to pick up?

Private sector investment has been weak, likely hampered by high corporate debt in investment-intensive sectors and ongoing challenges in the business environment and infrastructure gaps. Over time, measures implemented and planned such as GST removing barriers to trade within India, steps aimed at enhancing the business environment, encouraging foreign direct investment, providing greater visibility about future inflation will contribute to higher investment. Most of these measures will take time.

The FM has said that the fiscal glide path may be affected due to the structural changes India has undertaken. Do you think the fiscal deficit target for this year will be missed?

We forecast the general government budget deficit (state and Centre) at 6.5% of GDP this fiscal year, similar to the last two fiscal years. Lower government revenues than planned in the Budget and somewhat higher government spending could lead to a deficit somewhat wider than targeted. However, we think that the government’s commitment to fiscal consolidation remains. Over time, measures aimed at broadening the tax base and improving the efficiency of government spending will contribute to a gradual narrowing of the deficit. Together with robust and sustained nominal GDP growth, this would be conducive to a gradual decline in the government debt burden.

ENDORSES REFORMS

Moody’s upgrade is a hugely welcome endorsement of the govt’s reform policies, and the economy’s enormous potential. Key reforms will surely have large payoffs in the coming years. Economic cycle too is on an upswing

KUMAR M BIRLA | CHAIRMAN, AB GROUP

It’s a welcome development, but we also feel it was long overdue… it’s a recognition of the actions that the govt has undertaken. We also need to keep all these things in perspective

ARVIND SUBRAMANIAN | CEA

r s

Moody’s has noticed the seriousness of the government in carrying out the reforms like GST, which has been pending for 10 years. Some of these reforms are transformational

DEEPAK PAREKH | CHAIRMAN, HDFC

Borrowing costs are expected to come down for corporates. Banks are well poised to contribute to growth of economy. By January, some of the bad debt resolution plans should be in place

RAJNISH KUMAR | CHAIRMAN, SBI

A large part of capital allocation are ratings-led. It leads to lower credit premium for corporates and makes capital cheaper. Some more pension funds will now be able to invest in India

CHANDA KOCHHAR | MD & CEO, ICICI

It highlights the immense potential that India offers. More importantly, it also emboldens the government to stay true to the path of strong and transformational reforms

SUNIL MITTAL | CHAIRMAN, BHARTI ENTERPRISES

We believe private sector capital will still take some time to come back. The central & state governments and PSUs are expected to drive capital expenditure for another 9-12 months

S N SUBRAHMANYAN | CEO & MD, L&T

-Mumbai, 18 November, 2017

GDP surprise takes market to 6-month high, Sensex soars 241 points

GDP surprise takes market to 6-month high, Sensex soars 241 points

Robust GDP data for the December quarter allayed market fears as the Sensex on Wednesday rallied over 241 points to end at about a six-month high of 28,985 amid firm global cues.

GDP, microstatThe impact was such that even the broader NSE Nifty took back the 8,900-mark.

The Central Statistic Office on Tuesday showed that GDP expanded by 7 per cent in the third quarter, belying all fears of the note ban derailing economic activity. It also retained its first advance growth estimate for the fiscal at 7.1 per cent.

The Sensex took off on a positive note and went past the key 29,000-mark to touch a high of 29,029.17 before settling up by 241.17 points, or 0.84 per cent, at 28,984.49, a level last seen on September 8 last year when it had closed at 29,045.28.

The gauge had lost 149.65 points in the previous two sessions.

The NSE Nifty also moved up 66.20 points, or 0.75 per cent, to 8,945.80 after shuttling between 8,960.80 and 8,898.60.

A monthly PMI survey showed that India’s manufacturing sector grew for the second straight month in February.

Meanwhile, U.S. President Donald Trump, in his address to the Congress, took a more measured tone, saying he is open to immigration reforms.

Moody’s Investors Service said demonetisation will be credit positive for India as it is likely to reduce tax avoidance and corruption, which cheered market players.

“A surprise growth of 7.1 per cent in third quarter GDP data and no negative comments in Trump’s speech have given a renewed buying interest in the market. The impact of cash crunch seems over—estimated. Prima facie, the February auto sales numbers are looking better as discretionary spending is gradually picking up,” said Vinod Nair, Head of Research, Geojit Financial Services.

 Both the key indices have rallied by almost 9 per cent in the past two months, largely on the back of a growth-oriented Budget, better-than-expected earnings from bluechip companies and strong global cues.

The government pegged GDP growth at a higher-than-expected 7.1 per cent for 2016-17 despite the cash blues, with manufacturing and agriculture doing exceptionally well, which in turn made India keep the tag of the world’s fastest growing large economy.

Better Chinese factory readings led to a higher closing in Asia and and a better opening in Europe.

Stocks of automobile companies led by M&M, Hero Motocorp and Bajaj Auto were in limelight and gained up to 3.13 per cent largely on the back of encouraging sales numbers for February.

Other prominent gainers included Tata Steel, Dr. Reddy’s, ITC Ltd, Sun Pharma, HDFC Ltd, Axis Bank, Infosys, SBI, Hindustan Unilever, ICICI Bank, Power Grid and Cipla, rising by up to 3.66 per cent.

Out of the 30-share Sensex pack, 21 ended higher while 9 led by GAIL, NTPC, Tata Motors, Bharti Airtel, RIL, Coal India, Lupin and Wipro ended lower, which limited the gains.

The BSE realty index gained the most by surging 3.46 per cent, followed by metal 1.91 per cent, FMCG 1.30 per cent, bank 0.96 per cent and healthcare 0.87 per cent.

In step with the trend, the small-cap index rose 0.45 per cent and mid-cap 0.13 per cent.

Meanwhile, foreign investors bought shares worth Rs 1,146.23 crore on Tuesday, showed provisional data.

-PTI, MUMBAI, MARCH 01, 2017