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After Moody's Investors Services on Thursday raised the outlook on India's sovereign rating, all eyes are on when will it raise the rating itself. Moody's Senior Vice-President Atsi Sheth tells Indivjal Dhasmana that probability has increased for India to have improved economic fundamentals in 12-18 months that could prompt Moody's to upgrade the rating. Edited excerpts:
When can we expect a rating upgrade?
Our ratings reflect credit fundamentals, so a rating upgrade is generally associated with an improvement in these fundamentals. Our positive rating outlook for India reflects our view that the probability has now increased that over the next 12 to 18 months India's sovereign credit fundamentals will improve to levels consistent with a rating higher than its current Baa3 rating.
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Our ratings are a view on relative credit risk, which in turn, is determined by several factors, one of which is government policy both past, and expected in the future. The change in our rating outlook is based on a forward looking view that some of India's strengths (such as its growth rate, which on average has been above that of similarly rated peers for the last decade) will sustain, and some of its challenges (inflation, occasional balance of payments volatility, infrastructure weakness and regulatory complexity) will be addressed.
Inflation and the current account deficit, for instance, have already improved, and the inflation targeting framework is likely to facilitate transparency, credibility and effectiveness of monetary policy. Several measures related to mining and foreign direct investment have been passed in Parliament. And the government has emphasised its commitment to infrastructure development. But all of these policies are still at the initial stages. Whether they are sustained and effective will only be apparent over time. Our positive outlook reflects our view that sovereign credit improvements are likely, and the affirmation of the Baa3 rating reflects our view that India's credit profile is currently consistent with a Baa3 rating.
You seem to be carried away by recent upsurge in India's economic growth rates? But, much of these are accounted by the change in methodology. Have you taken this into account while upgrading India's outlook?
First, remember that growth is just one among several credit metrics that determine the sovereign credit profile. Second, our view on growth performance is broad and long term. It is also on a relative basis, that is, we look at India's performance relative to that of comparable economies. Here, even if you take India's GDP (gross domestic product) growth rates prior to the methodological and base year updates, i.e, the 'old' data, India's average GDP growth rate for the last decade was higher than the average for similarly rated peers. Methodological and base year updates to GDP routinely occur around the world, not just in India - but they are not a driver of rating changes. Lastly, while past growth performance is important, our ratings and outlooks are forward-looking, so it is also our expectation of future growth, particularly the likelihood of an investment revival that underpins our view on growth.
Inflation is down, fiscal deficit is down, current account deficit is down and external debt situation of India is quite comfortable, given the ratio of short term to long term debt, forex reserves cover, debt-servicing ratio, debt-GDP ratio. Then why do you see these as external and financial shocks?
Inflation as well as current account and fiscal deficits have been sources of credit stress in the past. Our outlook change takes into account that inflation and current account metrics have improved materially, and the fiscal balance is also improving, albeit more slowly. However, since our view is forward looking, we also look at the likelihood of macro-economic imbalances rising with growth. For instance, the GDP growth that is driven largely by higher leverage supporting domestic consumption, tends to result in higher inflation and current account deficits. Whereas GDP growth that is based on supply-side, productivity and competitiveness improvements is less likely to lead to macroeconomic imbalances. The next 12 to 18 months will give us more data on the composition and, thus, the sustainability, of GDP growth.
How do you think investors would see this action by Moody's? They could perhaps be waiting for a rating upgrade to upscale their investments.
Investment decisions are driven by several factors, of which the rating may be one.
