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Global Credit Research - 26 Jul 2010
Singapore, July 26, 2010 -- Moody's Investors Service has upgraded India's local currency
government bond rating to Ba1 from Ba2.
Moody's has also affirmed India's Baa3 foreign currency government
bond rating, narrowing the gap between the local and foreign currency
ratings to one notch.
The outlook on the local currency rating remains positive, while
the outlook on the foreign currency sovereign rating remains stable.
The main reasons for the local currency ratings upgrade are:
1. A broad range of institutional and structural reforms whose
deepening, over time, will result in gradual improvements
in the government's financial strength, support fiscal credibility,
and improve economic resiliency.
2. The absence of any heightened recourse to non-market
measures for financing the government's large stimulus program,
which could otherwise have carried credibility costs
3. The Indian economy's resilience throughout the global
4. The weakening of the structural and policy reasons that could
still allow the government to prioritize its external obligations over
its domestic obligations
India's short-term issuer rating of NP was not affected by
this rating action.
Likewise, the country ceilings remain unchanged at Aa3 for local
currency bonds, Baa2 for foreign currency bonds, A1 for local
currency deposits, and Ba1 for foreign currency deposits.
RATIONALE FOR THE Ba1 SOVEREIGN RATING AND NARROWER RATINGS GAP
"The upgrade of the local currency sovereign rating to Ba1 was prompted
by the Indian government's adoption of a medium-term (2010-2015)
fiscal consolidation strategy, which is supported by a broadening
structural reform program," said Mr. Aninda Mitra,
a Moody's Vice President and the company's lead sovereign
analyst for India.
"Ongoing policy normalization, disinvestments, fuel
subsidy reforms, along with impending tax reforms will support the
government's fiscal and debt position and are in line with,
and may even outperform, the government debt targets envisaged in
the 'revised roadmap for fiscal consolidation' -- as
laid out by the country's Thirteenth Finance Commission,"
said Mr. Mitra.
"The sovereign ratings also reflect the ability of policymakers
to temporarily mount sizable counter-cyclical policies without
weakening institutional credibility or damaging local investors'
faith in the government," said Mitra, adding,
"recent reforms follow closely on the heels of the demonstrated
resilience of the Indian economy which had performed better than most
emerging markets without any worsening of external or government debt
"The absence of non-market or repressive measures to raise
domestic financing for a substantial government borrowing program --
in a very stressful local and global environment -- also influenced
our decision to upgrade India's local currency rating,"
said the analyst.
RATIONALE FOR THE POSITIVE OUTLOOK ON THE Ba1 LOCAL CURRENCY RATING
The positive outlook on the Ba1 local currency sovereign rating encapsulates
the expectation that reasonable policy management and a deepening of reforms
will contain inflationary pressures, and reduce the risk of any
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. These are expected to
contain the risk of heightened structural fiscal pressures from a broadening
of social welfare programs.
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
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
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
Currently, the Indian government's foreign currency bond rating
of Baa3 and its stable outlook is well positioned given the country's
reasonably healthy external fundamentals, and macroeconomic prospects.
PREVIOUS RATING ACTION & METHODOLOGY
Moody's last rating action on India was taken on December 15, 2009,
at which time it changed the outlook for the Ba2 local currency sovereign
ratings to positive from stable.
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.
Sovereign Risk Group
Moody's Investors Service
Aninda S. Mitra
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308
Senior Vice President
Sovereign Risk Group
Moody's Investors Service
Moody's upgrades India's local currency rating to Ba1
No Related Data.
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