Indian stocks surge on Moody's first upgrade in 14 years

Cesar Mills
November 18, 2017

MoodyÂ's Investors Service today upgraded India's sovereign credit rating by a notch to "Baa2" with a stable outlook citing improved growth prospects driven by economic and institutional reforms.

The rupee surged as much as 1.1 per cent on Friday after worldwide rating agency Moody's Investors Service upgraded India's local and foreign currency issuer ratings to Baa2 from Baa3 and changed the outlook to "stable" from "positive". In addition, it has changed to stable from positive the ratings outlook for IRFC; EXIM India and its London branch; HDFC Bank, its Bahrain and Hong Kong branches; as well as SBI and its Hong Kong, London, and Nassau branches. The Narendra Modi government has been pitching for an upgrade for quite some time now citing various reforms initiatives.

The upgrade is likely to have a positive rub-off effect on equities, rupee, and bonds, industry insiders said.

Moody's upgrade, its first since January 2004, moves India's rating to the second-lowest level of investment grade.

"It seems like Santa Claus has already opened his bag of goodies", said Lakshmi Iyer, head of fixed income at Kotak Mutual Fund said.

The upgrade came after 13 years.

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"It's a recognition and endorsement of the reforms taken by the government particularly in the last three-four years..."

Going forward, the government will continue to emphasise implementation of reforms and "reap the benefits of the growth process in terms of expenditure, infrastructure building and rural areas", Jaitley said.

The move boosted Indian stocks more than one percent, while the rupee strengthened to 64.86 against the dollar, from Thursday's 65.29. "Looks like sentiments are going to become positive".

The agency also raised India's local currency senior unsecured debt rating to Baa2 from Baa3 and its short-term local currency rating to P-2 from P-3.

Taking on the detractors who blamed the Goods and Services Tax (GST) and demonetisation for destroying businesses, Jaitley said reformative steps including GST and noteban contributed in the betterment of the ratings. "Moody's expects real GDP growth to moderate to 6.7% in the fiscal year ending in March 2018 (FY2017)", the agency said. "Longer term, India's growth potential is significantly higher than most other Baa-rated sovereigns", it said.

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