The global ratings agency, Moody’s Investors Service upped India’s sovereign local currency rating by one notch from ‘Ba2′ to ‘Ba1′. Despite this raise, the rating is one notch below the investment grade. India’s foreign currency rating has been retained without change at the lowest investment grade of ‘Baa3′. This means that the country’s local currency sovereign rating outlook is positive, while that of the foreign currency sovereign rating is stable.
“The upgrade of the local currency sovereign rating to Ba1 was prompted by the Indian government’s adoption of a medium-term (2010-15) fiscal consolidation strategy, which is supported by a broadening structural reform programme,” elaborated Aninda Mitra, Moody’s VP and lead sovereign analyst.
To combat recession, the government had introduced various stimulus packages during 2008-09, which derailed plans of narrowing fiscal deficit. This led to further widening of fiscal deficit and various international rating agencies issuing warnings of downgrading sovereign ratings. However, with the government systematically tackling the issue of fiscal deficit with diverse stimulus exit strategies of varying scales, it is expected to reach below 5.5% of the GDP during the current fiscal.
The rating agency said, “Moody’s will consider unifying India’s local and foreign currency ratings at Baa3 should the track record of fiscal reforms deepen, and if — currently higher than usual — inflation pressures normalize.” This would provide the much-needed boost to government’s fiscal reforms and help in improving the creditworthiness of rupee.
The latest development means added confidence in the country’s economy and is useful in reassuring foreign investors and in attracting funds to India. This could also help in strengthening the rupee against foreign currencies, which in turn could bring in additional funds.
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