Moody's upgrades India debt rating

Moody's Investors Service today revised the outlook on India's Ba2 domestic currency debt rating to stable from negative, citing the recent stabilisation of the government's debt ratios.

This comes close on the heels of Standard & Poor's "� another international rating agency "� raising the outlook on India to positive from stable, citing improved prospects of a stable debt burden, about a fortnight back.

The revision in S&P's India outlook came 14 months after it upgraded the country's foreign currency rating to BB+ from BB. Moody's had, in January 2004, upgraded India's foreign currency rating in two important categories from 'speculative' to 'investment' grade.

The existing outlook on India's Baa3 country ceiling for foreign currency debt, the Ba2 country ceiling for foreign currency bank deposits and the government's foreign currency issuer rating is stable. The local currency guideline is Aa3 and the local currency deposit ceiling is A1.

Despite the upward revision in the outlook, Moody's said that all of India's fiscal indicators remain at extremely high levels relative to the country's local currency rating peers.

Such divergence is tolerated in India's case because of the particular characteristics of the public debt composition, which is overwhelmingly held by domestic residents and subject to strict capital controls.

The rating agency also pointed to specific policy measures that have contributed to the recent fiscal improvement, including an expansion of the tax net accomplished through a series of reforms over more than a decade.

Moody's indicated that the implementation of the unified value-added tax (VAT) in most of the states and Union Territories has kindled expectations of a significant narrowing of the states' consolidated fiscal deficit starting in 2005-06.

Moody's cautioned that issues related to coalition politics would continue to present challenges for fiscal consolidation as well as progress on structural economic reform.

"An ongoing improvement in India's fiscal credit metrics is expected to proceed, although occasionally, at an awkward pace," Mody's said.