Moody’s upgrade to India’s credit rating comes as a much-needed boost for India’s Prime Minister, Narendra Modi, who has been criticised for the fallout from the goods and services tax (GST) and demonetisation reforms. Indeed, Moody’s argued that Modi’s reforms will help to stabilize India’s rising debt levels. According to Reuters.
Moody's Investors Service upgraded its ratings on India's sovereign bonds for the first time in nearly 14 years on Friday, saying continued progress on economic and institutional reform will boost the country's growth potential. The agency said it was lifting India's rating to Baa2 from Baa3 and changed its rating outlook to stable from positive as risks to India's credit profile were broadly balanced. Moody's upgrade, its first since January 2004, moves India's rating to the second lowest level of investment grade. The upgrade is a shot in the arm for Prime Minister Narendra Modi's government and the reforms it has pushed through, and it comes just weeks after the World Bank moved India up 30 places in its annual ease of doing business rankings.
Moody's believes that Modi’s reforms have reduced the risk of a sharp increase in India’s debt, even in potential negative scenarios. On the GST reform, which converted India's 29 states into a single customs union, the rating agency expects it to boost productivity by removing barriers to inter-state trade. In addition, the recent $32 billion recapitalisation of state banks and the reform of the bankruptcy code are beginning to address India’s sovereign credit profile.
"While the capital injection will modestly increase the government's debt burden in the near term, it should enable banks to move forward with the resolution of NPLs."
Following the upgrade, India’s S&P BSE Sensex Index rose 1.1%, with metals, property and banks the strongest performers. The Sensex has risen 25% so far in 2017, while the banks sector is 42% higher. Retail investors have piled into financial assets and the banking system has been awash with funds since Modi unexpectedly banned high denomination bank notes last November.
As Reuters notes, the Indian government had been unsuccessful at persuading Moody’s to upgrade the rating in 2016.
Last year, India lobbied hard with Moody's for an upgrade, but failed. The agency raised doubts about the country's debt levels and fragile banks, and declined to budge despite the government's criticism of their rating methodology. The government cheered the upgrade on Friday with Economic Affairs Secretary S. Garg telling reporters the rating upgrade was a recognition of economic reforms undertaken over three years.
The Rupee and Indian bonds also rallied on the Moody’s announcement – although some debt traders expressed scepticism that the rally was sustainable.
"It seems like Santa Claus has already opened his bag of goodies," said Lakshmi Iyer, head of fixed income at Kotak Mutual Fund said. "The move is overall positive for bonds which were caught in a negative spiral. This is a structural positive which would lead to easing in yields across tenors," she said.
The benchmark 10-year bond yield was down 10 basis points at 6.96 percent, the rupee was trading stronger at 64.76 per dollar versus the previous close of 65.3250. "We have been expecting it for a long time and this was long overdue and is very positive for the market. Looks like sentiments are going to become positive," said Sunil Sharma, chief investment officer with Sanctum Wealth Management. However, debt traders said the rally was unlikely to last beyond a few days as the coming heavy bond supply and hawkish inflation outlook were unlikely to change soon.
"Who has the guts to continue buying in this market?" said a bond trader at a private bank.
India has basked in its status as the world’s fastest growing major economy and Moody’s forecasts suggests that it will continue to outpace China’s roughly 6.5% growth, but only marginally. In the fiscal year to March 2018, Moody’s expects the Indian economy to grow at 6.7% versus last year’s 7.1%. From Reuters.
Moody's noted that while a number of key reforms remain at the design phase, it believes those already implemented will advance the government's objective of improving the business climate, enhancing productivity and stimulating investment. “Longer term, India's growth potential is significantly higher than most other Baa-rated sovereigns," said Moody's.
Bloomberg published some initial reactions from portfolio managers and analysts.
Luke Spajic (head of portfolio management for emerging Asia at Pacific Asset Management Co. in Singapore)
- “The upgrade came sooner than expected. India has undertaken some tough but necessary reforms like demonetization and the GST, the benefits of which are yet to be fully calculated”
- “India is on the right long-term path with capital markets -- in both debt and equity -- pricing in potential improvements in investment quality”
Lin Jing Leong (investment manager, Asia fixed income, at Aberdeen Standard Investments in Singapore)
- “The upgrade has been long time coming” given Modi’s reform ambitions. “This is not a surprise -- we do believe all the rating agencies have been behind the curve somewhat”
- Initial Indian market reaction is likely to be knee-jerk, but we still expect dollar-India credit spreads, onshore India bonds and the rupee to continue outperforming the broader Asia and emerging-market bloc.
Navneet Munot (chief investment officer at SBI Funds Management Pvt. in Mumbai)
- This will boost global investors’ confidence in India, but factors like world monetary policy shifts and company earnings will also be key to foreign inflows.
- Investors like us who have long positions on India always expected an upgrade.
- The firm has been boosting equity holdings in Indian corporate lenders, industrial and telecommunications companies.
Nischal Maheshwari (head of institutional equities at Edelweiss Securities Ltd. in Mumbai)
- Equity markets have already given a thumbs up to the news”.
- It will lead to a reduction in borrowing costs, which is a major improvement.
- “For foreign investors in equity, it doesn’t change much as their concerns around high stock valuations remain. However, their commitment to the country is in place and the upgrade will only help reiterate their position”.
Shameek Ray (head of debt capital markets at ICICI Securities Primary Dealership in Mumbai)
- Foreign investors won’t be able to take full advantage of the positive sentiment from the upgrade as quotas for them to buy into rupee-denominated government and corporate debt are full, Ray says.
- “Whenever these quotas open up there will be keen interest to take India exposure,” but in the meantime Indian companies will get more access to offshore markets.
- “We could see them pricing dollar or Masala bonds at tighter levels”.
Ken Hu (chief investment officer for Asia-Pacific fixed income at Invesco Hong Kong Ltd.)
- The upgrade confirms Invesco’s positive view on India’s structural economic reforms.
- “With more political capital, Modi and his party are able to launch more difficult but more impactful structural reforms. The positive feedback loop will continue to lead to more credit rating upgrades of India in future”.
Chakri Lokapriya (managing director at TCG Asset Management in Mumbai)
- The upgrade is “very positive for banks, infrastructure and cyclical sectors”.
- “Banks will benefit strongly as their credit costs come down leading to a reduction in interest costs for infrastructure and manufacturing companies”.
Ashley Perrott (head of pan-Asian fixed income at UBS Asset Management in Singapore)
- The upgrade is a bit of a surprise, so the market is likely to see some initial bond-spread tightening.
- “But raising one notch does not make much difference from a fundamental perspective”.
Avinash Thakur (managing director of debt capital markets at Barclays Plc in Hong Kong)
- “The upgrade should help issuers from India as they are no longer on the cusp of investment grade”.
- “It makes a big difference to investors and we will see more dollar bond supply from India”.