The decision by Moody's is a shot in the arm for Prime Minister Narendra Modi's government and the reforms it has pushed through, and comes just weeks after the World Bank moved India up 30 places in its annual ease of doing business rankings.
In his comment, Bank of America Merrill Lynch (BofAML) Economist and Co-Head of India Research Indranil Sen Gupta said the rating upgrade supports its call that risks in India's government securities (G-sec) markets are overdone. Rupee, bonds and stocks rallied after the ratings upgrade.
USA credit rating agency Moody's on Friday upgraded India's sovereign rating to Baa2 from its lowest investment grade of Baa, while changing the outlook for the country's rating to stable from positive, and said its was based on the Indian government's "wide-ranging programme of economic and institutional reforms".
However, the rating agency has warned that if fiscal metrics and the outlook for general government fiscal consolidation deteriorates materially, then the ratings can be improved. "The reform program will thus complement the existing shock-absorbance capacity provided by India's strong growth potential and improving global competitiveness".
The government's move to recapitalise public sector banks (PSBs), along with the insolvency and bankruptcy code, would help address a key weakness in India's sovereign credit profile.
"Good news for the industry", Jindal said. Moody's had in January 2004 revised the rating on India to Baa3 from Ba1.
"Challenges with implementation of the GST, ongoing weakness of private sector investment, slow progress with resolution of banking sector asset quality issues, and lack of progress with land and labour reforms highlight still material government effectiveness issues", it said.
Moody's specifically mentioned GST and demonetization while applauding the various reforms undertaken by the government. HDFC Chairman Deepak Parekh said, "I've always felt India's rating was far below than what it should be".
The rating which has come after a gap of nearly 13-years is a sentiment booster and positive for flows into equities and debt market.
Moody's said it expects India's real GDP growth to moderate to 6.7 per cent in the fiscal year ending in March 2018 from 7.1 per cent a year earlier.
Moody's saw Indian economy picking up pace even though the GST and demonetisation have undermined growth over the near term.
"Longer term, India's growth potential is significantly higher than most other Baa-rated sovereigns", the agency said.
Rana Kapoor, MD and CEO Yes Bank, said the long overdue sovereign rating upgrade for India is an endorsement of institutional and structural transformations ushered in by the government in the last few years while maintaining fiscal prudence.
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