Bangkok--18 Aug--Moody's Investors
Moody's Investors Service has today published a new annual sovereign credit report on India. The report provides a detailed explanation of the rationale for the Baa3 foreign currency and recently upgraded Ba1 local currency rating.
India's ratings are based on four key methodological factors:
1. Medium economic strength: derived from a large, well-diversified economic structure within which rapid growth is supported by ongoing economic liberalization, high household savings, and a strong and competitive private sector. However, low income levels -- along with inadequate social and physical infrastructure, and rigidities in pricing mechanisms -- constrains a better assessment of the country's economic strengths.
2. Medium institutional strength: this is supported by moderately effective macroeconomic policies, a track record of incremental institutional reforms, and gradual improvements in governance.
3. Low government financial strength: which reflects the government's large debt and debt service burden, but, whose risks are offset by a favorable debt composition and structure; a semi captive financing pool; healthy external position; and ongoing fiscal reforms.
4. Low susceptibility to event risk: reflects a constitutionally based and well tested democratic framework which heightens the country's shock absorption capacities; and it also reflects a a well managed corporate and banking system where the lack of excessive external, commercial or household leverage imparts stability.
Rating outlook:
"The positive outlook on the Ba1 local currency sovereign rating encapsulates our expectation that reasonable policy management and a deepening of reforms will contain medium-term inflationary pressures, and reduce the risk of renewed fiscal slippage. It also reflects the political scope and the policy commitment for implementing reforms until the end of the current government's term in office in 2014, against the risk of heightened structural fiscal pressures from a broadening of social welfare programs," said Mr. Aninda Mitra, a Moody's Vice President and its lead sovereign analyst for India.
"Currently, the Indian government's foreign currency bond rating of Baa3 carries a stable outlook signifying evenly balanced risks to the country's reasonably healthy external fundamentals and macroeconomic prospects," he added.
What could eliminate the ratings gap:
Moody's ratings gap in favor of the Indian government's foreign currency obligations signifies a potential likelihood that the government of India could prioritize its external obligations over its domestic obligations.
The former are easily repayable and owed predominantly to official creditors; and the latter are onerous and owed largely to a statutorily pliable domestic creditor base.
However, even amidst a trying global and local environment, Indian authorities have remained on the course of implementing incremental institutional and regulatory reforms that are deepening and liberalizing domestic capital markets. And, improving government finances will also gradually ease the need for onshore controls, and risk socialization.
In this context, Moody's will consider unifying India's local and foreign currency ratings at Baa3 should the track record of fiscal reforms deepen, and if --currently higher than usual- inflation pressures normalize. These developments would underpin the government's structural reform program and improve its local currency creditworthiness.
What Could Change the Rating -- Up:
A significant and credible improvement in the government's fiscal and debt position; lowering and better management of inflation; and, improvements in infrastructure, supported by larger foreign direct investment inflows.
What Could Change the Rating -- Down:
Failure to progress on fiscal consolidation or a loss of inflation control and a sustained worsening of the external balance and foreign currency liquidity position. A sharp rise in subsidies which puts significant pressure on the fiscal position.
Previous rating action and methodology:
Moody's last rating action on India was taken on July 26, at which time it upgraded the local currency sovereign rating to Ba1, from Ba2, and kept the outlook on positive.
The principal methodology used in rating the Republic of India is Moody's Sovereign Bond Ratings Methodology, published in September 2008 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.
The new report titled "Credit Analysis: India" can be found at www.moodys.com