Mumbai: US-based ratings agency, Moody's Investors Service, on Friday upgraded India's sovereign credit rating by a notch to 'Baa2' after a period of 13 years and for the first time since 2004, with a stable outlook citing improved growth prospects driven by economic and institutional reforms.
Moody's had last upgraded India's rating to 'Baa3' in 2004. In 2015, the rating outlook was changed to 'positive' from 'stable'.
"The decision to upgrade the ratings is underpinned by Moody's expectation that continued progress on economic and institutional reforms will, over time, enhance India's high growth potential and its large and stable financing base for government debt, and will likely contribute to a gradual decline in the general government debt burden over the medium term," Moody’s said in a statement.
The global ratings agency, however, cautioned that high debt burden remains a constraint on the country's credit profile.
"Moody's believes that the reforms put in place have reduced the risk of a sharp increase in debt, even in potential downside scenarios," it said.
Moody's also said that the recently-introduced Goods and Services Tax (GST) will promote productivity by removing barriers to interstate trade. The GST is being criticised ever since its launch, with Rahul Gandhi, Congress Vice President, calling it a "Gabbar Singh Tax".
The rupee, bonds and stocks rallied after the ratings firm upgraded India to Baa2 from Baa3 and said reforms being pushed through by Modi’s government will help stabilize rising levels of debt. That’s a one-level shift from the lowest investment-grade ranking and puts India in line with the Philippines and Italy.
The rupee surged as much as 1 percent to 64.67 per dollar in Mumbai while the yield on the 10-year sovereign bond tumbled 11 basis points to 6.96 percent and the benchmark equity index rose 1.25 percent.
While government officials hailed the move as long overdue, some investors termed it a surprise given that India recently surrendered its status as the world’s fastest-growing major economy amid sweeping policy change.
"This is a positive surprise to the markets, especially in terms of timing," Bloomberg quoted Vivek Rajpal, a rates strategist at Nomura Holdings Inc. in Singapore. “One fear that was developing in the market was debt-flow positioning.”
The upgrade could prove to be a big win for the Bhartiya Janata Party (BJP), which is facing increasing attacks about the economic slowdown before key elections in Modi’s home state next month. And, hence soon after Moody's issued its statement, party president and union ministers took to Twitter to take credit of what they called as the Modi government's hard work behind the unexpected move.
"India’s largest ever increase in Ease of Doing Business rankings, Pew study ascertaining PM @narendramodi ji’s popularity, Moody’s upgrade are all reflections of Modi Govt’s hard-work and reform process", BJP president Amit Shah said in a message posted on Twitter.
Union Railways Minister Piyush Goyal in his reaction said," Recognising India's growth enhancing reforms under PM @narendramodi, Moody’s has upgraded India’s sovereign rating for the first time since 2004. Entire world is recognising "Sabka Saath, Sabka Vikas".