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Moody’s Gives Thumbs Up to Modi’s Economic Reforms

The rating agency acknowledged that the policy changes would ultimately foster strong and sustainable growth by making it easier to do business, boosting productivity and stimulating investment
The rupee, bonds and stocks rallied after Moody’s upgraded India to Baa2 from Baa3 and said reforms being pushed through by Modi’s government will help stabilize rising levels of debt.The rupee, bonds and stocks rallied after Moody’s upgraded India to Baa2 from Baa3 and said reforms being pushed through by Modi’s government will help stabilize rising levels of debt.

Forget India's economic troubles this year. Moody's thinks Prime Minister Narendra Modi is doing a fine job.

The agency has just upgraded India's credit rating for the first time in more than a decade, citing its confidence in policies that have been widely blamed for a sharp slowdown in growth,  CNNMoney reported.

Moody’s has upgraded India’s ratings after a gap of 13 years in a report released on Nov. 16. "The decision to upgrade the ratings is underpinned by Moody's expectation that continued progress on economic and institutional reforms will, over time, enhance India's high growth potential," Moody's said.

The upgrade is welcome news for Modi, who has seen India's GDP growth slump to a three-year low on his watch. The drop—from 7% at the end of last year to 5.7% in the quarter ended July—is being blamed on two of his biggest initiatives.

Modi abruptly banned 86% of the country's cash in November last year, with the aim of combating tax evasion and promoting digital payments. The ban delivered a sharp shock to India's cash-dependent economy that many businesses haven't recovered from.

Then, in July, the government replaced dozens of state tariffs with a single national sales tax. While largely seen as a positive move, the change further disrupted economic activity as businesses struggled to adapt.

Moody's acknowledged that the cash ban and tax reform "have undermined growth over the near term." But the policy changes would ultimately foster "strong and sustainable growth" by making it easier to do business, boosting productivity and stimulating investment, the ratings agency added.

Apart from the GST and demonetization, the other reforms that will help India’s economic fortunes include an improved monetary policy framework, steps taken to address the ballooning bad-loan problem, the Aadhaar system of biometric accounts, and targeted delivery of benefits through the direct benefit transfer system, Moody’s said.

To Maintain Fiscal Discipline

The government celebrated the rare upgrade. "It is a major international recognition of major economic and institutional reforms," Finance Minister Arun Jaitley told reporters.

He vowed to maintain the fiscal discipline, stating that the government "intends to stay on the course of fiscal consolidation in the medium term".

Moody's Investors Service upgraded India's local and foreign currency issuer ratings to Baa2 from Baa3 and changed the outlook on the rating to stable from positive.

But some analysts questioned Moody's timing and reasoning. Rival agencies such as S&P and Fitch have not upgraded India since 2006 and 2004 respectively.

Describing the cash ban as a positive factor for the Indian economy "should raise some eyebrows," Shilan Shah, India economist at Capital Economics, wrote in a research note. Shah added that Moody's had ignored loan waivers for farmers doled out by several Indian state governments this year, which could put more pressure on the country's public debt.

India will report its latest GDP growth figures on Nov. 30.

Markets Up

The rupee, bonds and stocks rallied after the ratings firm upgraded India to Baa2 from Baa3 and said reforms being pushed through by Modi's government will help stabilize rising levels of debt. That's a one-level shift from the lowest investment-grade ranking and puts India in line with the Philippines and Italy.

"This is an overdue correction," Modi's chief economic adviser Arvind Subramanian told Bloomberg Quint, referring to the upgrade. "This is a recognition of India's macro economic reforms. But it has also to be kept in mind that these are external factors. And the government will pursue its own reform agenda. And those will drive our economic development."

The rupee surged as much as 1% to 64.67 per dollar in Mumbai while the yield on the 10-year sovereign bond tumbled 11 basis points to 6.96% and the benchmark equity index rose 1.25%. Markets have welcomed the move, with the Sensex rising over 400 points on Friday morning at 33,520 and the Nifty gaining 120 points.

Some investors termed it a surprise given that India recently surrendered its status as the world's fastest-growing major economy amid sweeping policy change.

"This is a positive surprise to the markets, especially in terms of timing," said Vivek Rajpal, a rates strategist at Nomura Holdings Inc. in Singapore. "One fear that was developing in the market was debt-flow positioning."

 

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