At a meeting with economic affairs secretary Shaktikanta Das and other officials of the ministry, representatives from Moody’s are learnt to have said that a rating upgrade could be a reality when the benefits of reforms could be felt on the ground and the country’s banking sector stabilises. The finance ministry also pointed out that India was seen as a bright spot given the high rate of growth and that current account deficit was under control with inflation well within target. We are continuously monitoring the rating. “We see pressure building up in 1-2 years and any tangible change could bring about a change in rating”, said, Moody’s sovereign group senior VP, Marie Diron had said on Tuesday.
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It highlighted the passage in Parliament last month of the long pending Goods and Services Tax (GST) – billed as the biggest tax reform since Independence.
Moody’s had yesterday described muted private investment and NPAs as hurdles to an upgrade.
In terms of the monetary policy framework, the Government of India has notified a CPI inflation target of 4%, within a tolerance band of 2%-6% until March 2021.
“While the stock of impaired loans may still increase during the horizon of this outlook, the pace of new impaired loan formation should be lower than what it has been over the last few years”, according to a report released by Moody’s Investors Service on Monday.
Moody’s further said that with India’s credit rating materializing in the medium term based on reforms, it could potentially stabilize the macro-economic environment that is conducive to fiscal consolidation. In addition, the economy will remain vulnerable to fluctuations in monsoon rains, because of the only partial irrigation of crops and gradual progress in food storage and transport infrastructure.
It added that infrastructure gaps will likely continue to constrain investment and the rise in FDI will not make up for muted domestic investment. Moody’s estimates that the fiscal costs of equity injections in public sector banks are manageable, although they are larger than now budgeted and will add to the government’s challenge in meeting its fiscal targets.
According to the report some measures, if effectively implemented it can push India’s growth, notably an easing of restrictions on foreign direct investment to foster productivity, bankruptcy law for enhancing investor confidence and measures aimed at ease of doing business.
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The country’s sovereign rating now stands at “Baa3”, the lowest investment grade just a notch above “junk”.
