sqrrl blog-moodys update of india

Friday November 17th 2017 will no longer be called as Black Friday all thanks to Moody’s Investor Services. The International rating agency has upgraded India’s sovereign bond rating for the first time in nearly 14 years. The move clearly indicates that the rating agency endorses structural reforms undertaken by the current government under the leadership of Narendra Modi.

The agency lifted the country’s rating to Baa2 from Baa3, the latter being the lowest investment grade rating, and changed its rating outlook to stable from positive.

Moody’s changed India Inc’s mood

What has changed?

Sovereign bond rating upgraded from Baa3 to Baa2

Outlook to changed to “Stable” from “Positive

Why this change happened?

  • Aadhar and Direct Benefit Transfer – Unique identification number aiming to inculcate transparency and reduce parallel economy
  • Demonetisation – High denomination currency notes were banned, aimed at reducing parallel economy and increasing tax base
  • Goods and Services Tax (GST) – the single taxation system to help seamless transportation of goods while reducing compliance
  • New fiscal consolidation framework
  • Bank capitalization
  • Insolvency law, Non-performing assets

How the reforms will help?

Theses moves will collectively boost growth potential while improving business climate. It will improve transparency and will help in checking corruption and related activities that are disrupting growth related activities. The moves will make an ecosystem which will boost manufacturing capabilities, provide employment opportunities.

Impact of the move from Sqrrl’s desk

After the move from Moody’s, rupee, bonds and stocks rallied significantly on Friday. We believe the move was long overdue and it could further boost growth potential of the economy.

We believe the upgrade will lower borrowing costs for Indian government and companies. Indian companies will benefit from the upgrade, as investors would now be keen to lend to corporations from the country because of improving risk profile.  Companies looking to borrow dollar denominated loans will benefit especially as higher rating will have a direct impact on cost of borrowing especially at a time when the Reserve Bank of India is unlikely to lower its benchmark rate amid rising inflation. We believe the upgraded rating could save as high as 25-50 bps of the interest rate for companies that in turn will improve operating efficiency.

While the country’s high debt burden continues to worrisome we believe the reforms put in place have shown signs of improving financial risk profile of the economy. We believe that our PM Modi has been able to push through sweeping reforms that has garnered both positive and negative results. We believe that move such as demonetization and goods and services tax though have undermined near-term growth but will yield significant long-term benefits by promoting productivity, and transparency. The upgrade, to our belief, adds to a string of good news for the government after the significant improvement in ease of doing business by World Bank last month whereby Asia’s third-largest economy jumped 30 places to rank 100th. The move of upgrade came at time where it did enough to retain confidence in NaMo as a popular leader while retaining public confidence in the economy.

Lastly, we believe that the upgrade could provide big win for current government that was facing numerous attacks from opposition in relation to economic slowdown.

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