India upgraded to Baa2 from Baa3 by Moody’s

We all have heard that Moody’s has upgraded India’s rating from Baa3 to Baa2. But all of us have few questions in mind- what exactly is this upgradation? Why has MIS (Moody’s Investor services) upgraded India after 13 years? Do we benefit from this or is this some sort of trick to get more FDIs into India, because other top credit rating agencies like S&P Global, Fitch haven’t marked any changes in their comments.
After a bit of research, I could evaluate few points that were essentially considered for upgradation and felt to share a bit of my knowledge in this post.

What is Baa2?

Every credit rating company has it’s own style of rating a long-term obligation of a country, organization, LLC etc. Gradations of creditworthiness are indicated by rating symbols, with each symbol representing a group in which the credit characteristics are almost the same. Moody’s uses alphanumerics, while S&P and Fitch use alpha-symbols to rate the same company. If a company’s credit-worth is rated Baa2 by Moody’s then S&P’s rating could probably be BBB. The chart below can explain the ratings better.

Example :- If Mr. X wants to start a fleet of cars but doesn’t have sufficient capital so he approaches a bank for a loan, may be with proper documentation he might get a loan. To his fortune he makes some good profits and clears his debt in time, then his business is given a rating based on the punctuality of repayment. Now he wants to expand his business by adding more cabs in many areas but he again falls short of funds, so he approaches his bank again for a bigger amount this time. At this point bank is more concerned about the credibility of his business than the documentation (of course documents are necessary). Since Mr. X did not default his previous loan, he might be lucky enough to get a better amount for a lesser CoC.

What is this Upgradation :-

MIS has upgraded India’s sovereign ratings from positive to stable which is a welcome call for FDIs because investors prefer a notch above junk and this upgradation has reduced the level of risk to investors investing in India and has given them a little more confidence.

Rationale for raising the rating to Baa2 –

Two key reforms took place in India in the last two years though many reforms were proposed – Demonetization in 2016(to curb unexplained money) and introduction of GST in 2017(removing barriers to interstate trade). Moody’s believe that these two reforms if work according to the plan India will have a sustainable growth in the economy.

MIS expected GDP growth rate to increase to 6.7% and stabilize but the actual growth rate is 7.1% annually which means production in India has rose providing more employment opportunity to people after successfully implementing the reforms.

How does India benefit from this :-

As I said earlier in this post, demonetization and GST has caught the attention of international investors which helps to get FDIs at lower rate thus reducing the cost of capital.
Reduced COC promotes GOI(government of India) to start more projects that are required but stopped due to insufficient funds, helps businesses expand their scale resulting in overall development of the country.

How does India get more FDIs :-

Increasing the rating is nothing but increasing the confidence of investors on India’s credibility. More the confidence more the investment.

Effects :-

The investment if received and if utilized properly and if the projects invested on generate revenue as projected or more constantly then the rating can be upgraded to Baa1 while for any reason if the same does not work then rating can go down which might have unexpected consequences.

Other Upgradations :-

Apart from sovereign bond there are few more industries that received an upgraded rating

  • Export-Import Bank of India’s (EXIM India)
  • NHAI’s Medium term note programme(MTN) also received a provision Baa2 rating

Author: Shyam Chegu

An aspiring financial analyst, pursuing MBA in finance at CMS business school, worked as an analyst for Moody's analytics, practical learner and a traveler.

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