Moody's is happy with Modi, but what about a credit rating revision now?

Moody’s ‘outlook’ revision comes just in time for Prime Minister Modi’s mega tri-country tour that is being pegged as a big bid to bring in investments as well as get going the much touted nuclear deal with France. While it does bolster the reformatory steps that the government is implementing, largely instilling confidence in the policymakers that they are moving in the right direction, what does throw a slight dark shadow over the capital Modi seeks to raise from the three countries for India’s infra sector is that the ‘rating upgrade’ remaining elusive.

Moody on Thursday revised its outlook from ‘stable’ to ‘positive’ primarily basis an expectation that policymakers will take the country back into its aggressive growth momentum within the medium-term. Not only that, in the statement by the credit rating agency, it said it expected that structural advantages, supported by relatively benign commodity prices and liquidity conditions globally, will keep India's growth above its peers over the rating horizon.

However, despite this ‘thumbs up’ to India’s economic outlook, Moody’s still didn’t show enough confidence in India’s growth trajectory to revise the actual rating upward from the current Baa3. These are the three big reasons it gave for not revising the rating.

1) Economy still ‘weak’: India's Baa3 government bond rating reflects India's weaker performance - relative to peers - on fiscal, inflation and infrastructure-related metrics, says Moody's, citing the rationale for not upgrading the credit rating. While admitting that policies are beginning to address each of these factors, Moody's feels that the extent of likely improvements is as yet unclear.

2) Slow impact of ‘policy measures’ taken by the government: Moody's is of the opinion that recurrent inflationary pressures, occasional balance of payments pressures, and an uncertain regulatory environment have contributed to periods of volatility in growth, and have exposed India to external and financial shocks, constraining its credit profile. However, the agency believes that recent measures to address inflation, keep external balances in check, simplify the regulatory regime for investors, increase foreign direct investment, and facilitate infrastructure development will reduce some of India's sovereign credit constraints. "Many of these measures are at relatively early stages of design and have yet to be implemented," the agency says. According to Moody's, the ability of policymakers to strengthen India's sovereign credit profile to a level consistent with a higher rating will become apparent over the next 12-18 months.

3) Unstable banking system: Moody's adds that the banking system's asset quality, loan loss coverage and capital ratios are relatively weak. "This poses sovereign credit risks because of the banking sector's role in financing growth as well the government's deficits through its purchase of government securities, and the contingent liabilities due to the government's ownership of a major portion of the banking sector," the release says. "In the absence of any improvement in banking-system metrics over the coming months, India's sovereign credit profile will remain constrained. The Baa3 rating incorporates the risk that higher levels of growth and infrastructure development will be accompanied by higher leverage," the release says.

The agency however maintained that that India's economic progress over the next 12-18 months will determine the direction it will take as far as the rating upgrade is concerned.