Don’t miss the latest developments in business and finance.

3 reasons why Moody's has revised India's outlook

Here are three reasons why the Moody's has revised India's outlook

Puneet Wadhwa New Delhi
Last Updated : Apr 09 2015 | 10:23 AM IST
Moody's Investors Service changed India's outlook to 'positive' from 'stable' earlier and affirmed 'Baa3' credit rating on Thursday. The rating agency believes that India's policymakers are on a road to establishing a framework that will not only improve the country's macro-economic, infrastructure and institutional profile, but also help India's growth outperform its peers over the medium - term.

Though Moody's is optimistic about the road ahead for the Indian economy and the government's reform process, it says that the rating could be revised upwards if there is enough evidence that policymakers are successful to introduce growth - enhancing and growth - stabilizing economic and institutional reforms.

However, the outlook can be revised back to 'stable' if economic, fiscal and institutional strengthening appeared unlikely, or banking system metrics remained weak.

EXPERT VIEW

The revision in rating has surprised analysts given the fiscal consolidation roadmap spelt out by the government. However, they do believe that in terms of policy framework, the lawmakers are on the right track and the overall economic growth will see India perform better than in peers.

"In our view, the timing of the Outlook change is surprising given that the central government pushed out its medium-term fiscal consolidation path by a year in the recent budget, while our analysis of recent state budgets suggests no fiscal consolidation on a general government basis, i.e. centre plus state level," said Sonal Varma and Aman Mohunta of Nomura in a report.

"However, we agree that India's economic fundamentals are improving with the government focussed on boosting investment and productivity and the Reserve Bank of India (RBI) focussed on keeping inflation low. This policy combination should ensure growth with macro stability in the coming years and should make India stand out relative to its peers. Overall, the outlook change is encouraging and will expect it to be a positive surprise for the markets," they add.

Here are three reasons why the Moody's has revised India's outlook:
 

More From This Section

Policy-related measures: One of the reasons Moody's has cited is the expected action by policymakers that could enhance India's economic strength, and in turn, positively impact the financial strength over the next few years.
 

Better growth rate than peers: Favourable demographics, economic diversity and high savings and investment rates has seen India grow at a faster clip than similarly rated peers over the past decade, Moody's said. Given these advantages that will be supported by soft global commodity prices and liquidity, Moody's believes that India's growth rate will be better than its peers going ahead.

It, however, warns that recurrent inflationary pressures, occasional balance of payments issues and an uncertain regulatory environment have contributed to periods of volatility in growth. All this has exposed India to external and financial shocks, constraining its credit profile.
 

Sovereign credit constraints: Moody's believes that recent measures to address inflation, keep external balances in check, simplify the regulatory regime for investors, increase foreign direct investment, and facilitate infrastructure development will reduce some of India's sovereign credit constraints. However, the rating agency believes that the ability of policymakers to strengthen India's sovereign credit profile to a level consistent with a higher rating will only become apparent over the next 12 - 18 months.

 

Also Read

First Published: Apr 09 2015 | 9:58 AM IST

Next Story