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Current Affairs

Moddy’s upgrades India ratings

Date: 07 October 2021 Tags: Basics of Economics

Issue

Rating agency Moody’s has upgraded India’s sovereign rating outlook from ‘negative’ to ‘stable’ owing to economic recovery.

 

Background

 India’s sovereign rating was earlier degraded by Moody’s from ‘Baa2’ to ‘Baa3’, the lowest investment grade.

 

Details

  • The upgradation is due to the receding negative feedback between real economy and financial system.

  • The agency had expressed difficulty in mitigating risks of a sustained period of low growth and deteriorating fiscal position for the low numbers.

 

Reason for changes

  • India has higher capital cushions and greater liquidity that prevented banks and non-bank financial institutions from posing more damage to sovereign.

  • Moody expects that general government fiscal deficit will start reducing over the next couple of years that will prevent further deterioration of sovereign profile.

  • Currently, the government suffers from high debt burden and weak debt affordability. This however is expected to ease out.

 

Strengthening banking system

  • Banks have been successful in improving their finances by recovering Rs 5.01 lakh crore of bad loans from defaulters.

  • The government has also infused capital worth 3.06 lakh crore in state-owned banks in the last five years. Further, reforms have been initiated to strengthen banks.

  • The setting up of National Asset Reconstruction Company Ltd (NARCL)to recover Rs 2 lakh crore worth of stressed assets has also helped improve approval ratings.

 

Growth assessment

  • The GDP is expected to record a growth rate of 9.3 per cent this fiscal year followed by 7.9 per cent in fiscal 2022. Over the medium term, the growth is expected to be around 6 percent.

  • There are arguments that Moody’s has underestimated India’s potential of real GDP expansion as it has enough power to clock higher growth.

 

Impact of upgrade

  • The sovereign ratings are directly linked to borrowing rates. Improvement in ratings will enable India to borrow at a lower cost.

  • The receding level of defaulters has instilled confidence among foreign investors to subscribe government and corporate bonds at lower rates.