Rating game: Moody’s upgrade India’s rating after 14 years

In a major reversal of its rating, international rating agency – Moody’s Investors Services has upgraded India’s sovereign rating for the first time in 14 years. The agency has upgraded the country from ‘Baa3 to Baa2 and tagged ‘positive’.

Moody's upgrade will give a big political boost to Prime Minister Modi's economy management that is featured by numerous ease of doing initiatives though overshadowed by the sinful demonetisation venture and hasty launch of the big push reform -GST. 

The rating gives one notch up in the medium grade category. The medium grade has three sub-grades - Baa1, Baa2 and Baa3. India is now upgraded from Baa3 to Baa2. Above this medium grade (comprising Baa1, Baa2 and Baa3), there are three more top grades – upper medium grade (A, A2, and A3), high grade (Aa1, Aa2 and Aa3) and the highest grade of Aaa.

Investment grade denotes that the country has the capability to meet all debt service payments is divided into A categories and top B categories.

As per the agency, the factored reason for the upgradation, that surprisingly came in a year when Indian economy faces slowdown is attributed to ‘Economic and institutional reforms that will improve business climate’. This means the rating upgrade is based on expectations rather than actuals and may not be necessarily followed by other rating agencies – Standard and Poor and Fitch.

Over the last few years, the government and the rating agencies were on a turf war with the government accusing rating agencies following dubious rating practices by keeping India’s rating low despite good economic progress. In the Economic Survey, Arvind Subramanian sarcastically attacked the approaches of the agencies in the Economic Survey 2017 describing it as ‘Poor Standard’. He questioned the methodology of agencies and observed that their rating of US derivatives that caused the global financial crisis was Aaa.

Finance Minister Arun Jaitley described the rating upgrade as belated recognition.

Usually, improved rating creates a positive impact on the country’s financial market. But given that most market segments are adjusted to the positives pointed out by Moody’s, the rating may not bring the expected gains except creating a bullish surge in the equity market. 

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