Moody's upgrades India's sovereign rating to Baa2 from Baa3, what does it imply for the economy?

In what came as a major boost to the nation's economic health, US credit rating agency Moody's on November 17 upgraded India's sovereign rating to Baa2 from Baa3 and revised the outlook from positive to stable. 

The ratings upgrade was of great significance as the last revision in India's sovereign ratings happened 13 years back in 2004, when Moody's upgraded India's ratings to Baa3, the lowest investment grade and just a notch above the junk category.

The ratings revision testifies India's ever improving economic landscape and comes at the back of India's steep rise in the World Bank's Ease of Doing Business ranking which saw us climbing 30 spots to break into the top 100.

The rating upgrade is reflective of India's improvement in macro-economic indicators triggered by path breaking economic reforms initiated by the Modi led government in the form of Goods and Services Tax, direct transfer benefit scheme, and recapitalisation of public sector banks to name a few.

A sovereign rating upgrade does not just come about every now and then. A rating agency of international repute like Moody's, S&P or Fitch carries out an in-depth analysis of the economic growth and credit worthiness of a country over a sustained time frame and then takes a call on whether the economic outlook for the country is on the upwards or witnessing a decline. 

Factors which play an important role in deciding a nation's sovereign rating

Whenever a credit agency makes a rating upgrade or downgrade for a sovereign nation and its debt instruments, it takes into account the prevailing economic parameters in the country. Economic indicators like GDP growth, per capital income, inflation, industrial output and productivity, foreign investments, balance of trade are some key parameters used to gauge the economic health of a nation. 

In addition to economic factors, the agency also takes cognizance of how stable and well run is the political establishment and how transparent and efficient is the legal framework or laws for transacting business. 

So in layman's terms, let us understand what implications would Moody's rating upgrade have on the Indian economy.  

Reduced Cost of Borrowing, Cheaper access to funds

A upgrade in the sovereign ratings reduces the cost of capital to borrow funds from the Indian markets and makes finance available for corporate houses and the foreign investors at a cheaper rate. It thereby helps in improving the liquidity of a company and gives them the option to enhance their capital expenditure and make investments.

Cheaper access to funds in foreign markets for Indian corporates 

Indian corporates looking to raise funds from abroad will find it easier to secure funds at a lower rate, especially as India's revised ratings will directly lower cost of borrowing due to a favourable risk profile. This comes as a boon for Indian companies, at a time when the RBI has kept a neutral stance on its benchmark rate amid rising inflation in India.

Higher inflow of FDI to boost liquidity in stock markets

An investment grade sovereign rating certainly helps in making the nation's stock markets more lucrative and a safer place to invest in. Hence the inflow of Foreign Direct Investments is bound to rise as the investors are expected to fetch a much higher rate on their investments.The FDI inflow also helps boosting the liquidity in the markets helps create a bullish sentiment among traders and investors.

Impetus to capital expenditure by Govt for structural reforms

The cheaper cost of funds leads to additional liquidity in the markets, enhancing the money supply coming into the government's kitty which it can use for executing projects in areas like transport and infrastructure and bring about structural reforms to boost the economy

So taking a look at the positives coming out of the ratings upgrade, it is safe to assume that the Indian economy which had been slighty derailed in the last two fiscal quarters post demonetisation due to declining industrial output coupled with rising inflation is finally back on track and looks to grow at a healthy pace in the near future.