Ceiling on foreign currency deposits raised to Ba2.
Recognising Indian economy’s ability to quickly overcome the effects of the global financial crisis, rating agency Moody’s today upgraded its outlook on Indian government’s local currency bond rating (Ba2) to positive from stable.
It also raised the ceiling on banks’ foreign currency deposits to Ba1 from Ba2.
The change in the outlook on the local currency government bond rating was prompted by increasing evidence of resilience shown by Indian economy in charting out a high growth path with its underlying credit metrics relatively intact, Moody’s Investor Services said in a statement today.
Moody’s latest action, however, does not affect the outlook on the government's foreign currency bond ratings, which remains stable at Baa3.
Such decision paves way for a possible narrowing of the gap between the government’s local currency and foreign currency bond ratings.
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Rohini Malkani, an economist with Citigroup India, said revisions were encouraging and bode well for the external sector. While the move can be perceived as a ‘catch-up’ with other rating agencies, it signals that steps towards fiscal consolidation would support a further improvement in ratings.
Moody’s said the exceptional strength of India’s external position was such that holding a foreign currency government debt instrument was less risky than holding a local currency government debt instrument.
“We are reconsidering now whether a two-notch rating gap is appropriate, in the context of our recent practice of eliminating most rating gaps and having a single measure of government creditworthiness,” the agency said.
Amid a trying global environment, relative stability in the government debt trajectory coupled with the high level of debt finance ability suggest that narrowing of the gap should rather come from an upgrade of the local currency bond rating.
Mitra said, “Fiscal credibility remained a relative credit drawback, but this shortcoming and its attendant risks were being contained by the economy's high growth and resilience, large domestic savings, favourable debt structure, domestic monetary confidence and strong external position.”
Indeed, the finance ability of the domestic currency debt has been enhanced by regulatory measures which have made holding government debt more favourable for banks.
“Moreover, the government's large fiscal stimulus programme and strong growth response have set the stage for a successful exit strategy, leading potentially to a deceleration in its fiscal financing requirements,” he said.
The ability of the government to run strong counter-cyclical policies — without damaging investor’s confidence or impairing underlying fiscal sustainability— is a supportive development.
Mitra said “this is an important criterion in considering a narrowing of the Indian government’s sovereign rating gap with a positive outlook on the local currency rating.”
The outcome of the next phase of India’s fiscal responsibility act, and the precise nature and extent of the government's fiscal consolidation programme will be critical in determining the near-term course of changes in sovereign ratings.
Moody's last rating action on India was taken on January 22, 2004, when it upgraded the foreign currency ratings to Baa3 from Ba1.