Moody's set to up India rating

"Official foreign currency reserves have continued to grow, reaching $83.8 billion (excluding gold) earlier this month, equivalent to about 10 months of current account payments as well as amply exceeding external debt service requirements," a Moody's release in London said.

Moody's expects India's growth to reach 7 per cent this year. The country posted a 5.7 per cent GDP growth in the second quarter of the current year.

In February this year, Moody's had upgraded India's country ceiling for foreign currency debt from Ba2 to Ba1 after a gap of nearly five years. However, despite the upgrade, the rating is still sub-investment grade. In fact, it is one notch below the investment grade Baa3.

In February, the agency did not change the outlook on the Ba1 foreign currency debt ceiling which remained stable.

Moody's had downgraded India to sub-investment (speculative grade) in June 1998 in the aftermath of the Pokhran blasts. Subsequently, in October 1999, it changed the outlook from stable to positive but again in August 2001, the outlook was lowered to stable on account of macroeconomic concerns.

India's foreign currency assets, including gold, were at $87.738 billion on October 3, up from $74.667 billion on February 7.

"Although large capital inflows are exerting an upward pressure on the exchange rate, which is being blamed for the recent slowdown in export growth... additional liberalisation may ease these pressures going forward," the agency said.

India's foreign currency assets, including gold, were at $87.738 billion on October 3, up from $74.667 billion on February 7, according to official Reserve Bank data.

The agency has, however, retained its negative outlook on the government's 'Ba2' domestic currency rating and the 'Ba2' ceiling for foreign currency bank deposits, citing the dire fiscal situation.

It said the country's worsening fiscal situation was a disappointing contrast to its strong external position, and serious efforts to address the issue were unlikely with national elections due next year.

Moody's review would focus on how much the deficit and debt burden impair the prospects for growth and whether the external liquidity position could provide a buffer against potential shocks.

Another global rating agency Standard & Poor's had retained India's sovereign rating at "junk" grade in January this year on account of high public debt and serious fiscal inflexibility. It also maintained a negative outlook of India at that time.

The main reason for Moody's upgrading India's foreign currency rating in February was the substantial improvement in India's external liquidity position.