Moody's meet on India rating next week
India, which enjoys a Baa3 rating from Moody's, cannot afford to see its credit worthiness downgraded as it will dip to sub-investment grade.
By Sidhartha, TNN | Updated:
NEW DELHI: A team from ratings agency Moody's to review India's sovereign rating will hold consultations with policymakers next week amid slowing economic growth and rising fiscal pressure.
India, which enjoys a Baa3 rating from Moody's, cannot afford to see its credit worthiness downgraded as it will dip to sub-investment grade. As a result, several foreign institutional investors may want to stay away from India since their investment policies bar them from investing in speculative grade papers. It will have little adverse impact on government fund raising as the Indian government does not raise resources in foreign markets.
In July 2010, the ratings agency had upgraded India's local-currency government bond rating to Ba1, citing improved fiscal performance. But this rating is sub-investment grade. The sovereign rating review, a periodic exercise, comes amid criticism over the way Moody's has dealt with the Indian banking sector by first cutting SBI's rating by a notch and then lowering the outlook on the sector from stable to negative.
The government is, however, rolling out the red carpet for ratings agencies as it wants to avoid any adverse reaction at a time when global factors are already creating trouble for several economies, especially those in the West. The finance ministry has developed a special module to deal with ratings agencies in the hope that it can flag the strengths of the Indian economy and try to present a picture that economic fundamentals are robust and debt levels are not just manageable but significantly lower than levels seen in several advanced countries. In addition, the government is expected to reiterate its commitment to returning to fiscal consolidation and discuss a possible reforms agenda, with heavy focus on the legislative business.
In the annual sovereign report on India, issued on September 4, the agency had cited weak government finances, slowdown in the policy process due to political factors, susceptibility to inflationary pressures and poor infrastructure - both physical and social - as key challenges facing the Indian economy.
At the same time, strong growth, a diversified economic structure, a high savings rate and a comfortable balance of payments position were seen to be factors working for the economy. But if there was one thing that came out for special mention it was the fiscal position although it came with the rider that the risk due to external shock was not significant. "The report observes that government debt equals 71% of GDP. The government's interest payments on this debt account for approximately 25% of its revenues, a ratio higher than the median for Baa and Ba rated countries. This significant debt and interest burden limits the fiscal flexibility to respond to future shocks and to increase spending on much needed social and physical infrastructure," Moody's had said.
India, which enjoys a Baa3 rating from Moody's, cannot afford to see its credit worthiness downgraded as it will dip to sub-investment grade. As a result, several foreign institutional investors may want to stay away from India since their investment policies bar them from investing in speculative grade papers. It will have little adverse impact on government fund raising as the Indian government does not raise resources in foreign markets.
In July 2010, the ratings agency had upgraded India's local-currency government bond rating to Ba1, citing improved fiscal performance. But this rating is sub-investment grade. The sovereign rating review, a periodic exercise, comes amid criticism over the way Moody's has dealt with the Indian banking sector by first cutting SBI's rating by a notch and then lowering the outlook on the sector from stable to negative.
The government is, however, rolling out the red carpet for ratings agencies as it wants to avoid any adverse reaction at a time when global factors are already creating trouble for several economies, especially those in the West. The finance ministry has developed a special module to deal with ratings agencies in the hope that it can flag the strengths of the Indian economy and try to present a picture that economic fundamentals are robust and debt levels are not just manageable but significantly lower than levels seen in several advanced countries. In addition, the government is expected to reiterate its commitment to returning to fiscal consolidation and discuss a possible reforms agenda, with heavy focus on the legislative business.
In the annual sovereign report on India, issued on September 4, the agency had cited weak government finances, slowdown in the policy process due to political factors, susceptibility to inflationary pressures and poor infrastructure - both physical and social - as key challenges facing the Indian economy.
At the same time, strong growth, a diversified economic structure, a high savings rate and a comfortable balance of payments position were seen to be factors working for the economy. But if there was one thing that came out for special mention it was the fiscal position although it came with the rider that the risk due to external shock was not significant. "The report observes that government debt equals 71% of GDP. The government's interest payments on this debt account for approximately 25% of its revenues, a ratio higher than the median for Baa and Ba rated countries. This significant debt and interest burden limits the fiscal flexibility to respond to future shocks and to increase spending on much needed social and physical infrastructure," Moody's had said.
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