Moody's unlikely to review India's rating

India's local currency bonds will keep a non-investment rating as the government isn't reducing its budget deficit fast enough, Moody's Investors Service said.

The rating "remains constrained'' at Ba2, two notches below investment grade and the same level as Armenia and Jamaica, as state debt equal to three-quarters of the economy "leaves public finances vulnerable,'' Moody's lead sovereign analyst for India, Aninda Mitra, said in an e-mail to Bloomberg News.

India's junk credit rating means it will pay more for borrowings and impair the investments needed to boost growth and reduce poverty in a nation where half the population of 1.1 billion people lives on less than $2 a day. Moody's has raised credit ratings of China and South Korea in the past fortnight, due to their expansion and rising foreign reserves.

``It's important for India to get its local currency credit rating up to boost infrastructure spending and lift growth,'' said Michael Preiss, an associate director at HSBC Holdings Inc.'s investment advisory group in Dubai.

``India's infrastructure funding is best met by rupee borrowings to prevent asset-liability mismatches from currency depreciation.''

The yield on the benchmark 10-year government bond fell 1 basis point to 7.85 percent as of the 5:30 p.m. close in Mumbai, according to the central bank.

The rupee, which has gained 9.5 percent this year, making it Asia's best performer among the 10 most active currencies, fell 0.2 percent to 40.4235.

India's government plans to spend as much as $450 billion by 2012 to build new roads, sea ports, airports, railways and power stations and accelerate economic growth to 10 percent from an average 8.6 per cent in the past four years.

Prime Minister Manmohan Singh estimates 60 percent of the infrastructure need will have to be met by local funding. Singh is focused on infrastructure to attract more factories and create jobs in the world's second-most-populous nation.

Inadequate capacity in power and other infrastructure shaves 2 percentage points from India's economic growth, the finance ministry estimates.

Capacity addition of electricity in the past five years, for example, was less than 57 percent of the target, taking the peak power deficit to an eight-year high in the fiscal year ended March 31, according to the central bank.

Moody's raised China's long-term foreign-currency rating by one level to A1, the fifth-highest ranking, on July 26, buoyed by $1.3 trillion of foreign reserves that shield the economy from overseas slumps.

China's local-currency debt was also assigned A1, seven notches above India's. China's economy, Asia's second-biggest, grew 11.9 percent in the second quarter.

South Korea's long-term foreign and local-currency credit ratings were boosted to A2 on July 25 as the economy grew at the fastest pace in 18 months in the quarter ended June 30.

Standard & Poor's raised India's local-currency debt rating by a notch to BBB-, the lowest level on investment grade, on Jan. 30 after assigning a non-investment rating since September 2002. It has a BBB- rating on India's foreign-currency debt rating.

Moody's has kept India's local-currency debt rating at par with Fiji and a notch lower than Guatemala and Azerbaijan, retaining the Ba2 assigned since June 1998. It rates India's foreign-currency debt Baa3, the lowest level in the investment grade, as India's foreign exchange reserves rose to a record $225 billion, or almost a quarter of the economy.

``Although external accounts continue to show improvements, it is hard to envisage widening the existing two-notch gap between the existing foreign currency bond rating and the local currency bond rating,'' Moody's Mitra said.

``The deficit reduction is encouraging though not yet fast enough to bring the overall deficit-GDP ratio and the debt-GDP ratio in line with those similarly rated countries in the foreseeable future.''

The Reserve Bank of India expects India's total debt, of both the federal and state governments, to decline to 74.2 per cent of gross domestic product in the year ending March 31 from 77 per cent in the previous year. The combined federal and state budget deficit may fall to 5.3 per cent of GDP from 6.2 percent of GDP in the same period, the central bank estimates.

Still, Mitra said the Indian federal government's interest payments account for 27 percent of its revenue, and this ``leaves public finances vulnerable to unforeseen growth shocks, though we are comforted by the negligible share of foreign currency denominated debt in total government debt.''

Concerns about growing debt prompted the federal government in July 2004 to enact a law that makes it mandatory to cut the central budget deficit by 0.3 percent of GDP annually until 2009. The government forecasts the deficit will decline to 3.3 percent of GDP in the year to March 31, and to the targeted 3 percent of GDP by March 2009.

Finance Minister Palaniappan Chidambaram said last month that tax revenue is buoyant as rising investments and consumption propel India's economy to growth of over 9 percent for the third year in a row.

``When the fiscal responsibility law was legislated, the trend growth was regarded as being around 7 percent to 8 percent,'' Mitra said. ``Consequently, with actual GDP growth having exceeded 9 percent for several years in a row, we think that fiscal consolidation could have proceeded faster.''