Moody’s Ups India’s Sovereign Rating- Rating Upgrade – Much Needed Booster Dose

Moody’s has upgraded India’s local and foreign currency issue ratings from Baa2 to Baa3 and revised outlook from positive to stable. 
 Current rating upgrade has come after 13 years for the country. Though rating upgradation was expected sooner or later, India’s back-to-back reforms and improvement in EODB (Ease of Doing Business) scale entailed the upgradation bit early, in a scenario of soaring oil prices and risk lingering over government’s fiscal consolidation. 

Rating upgrade decision by Moody’s is underpinned on the expectation that India’s government’s debts are unlikely to increase on the backdrop of: 
(a) progress on economic and institutional reforms that will eventually lead to gradual decline in government’s debt in the medium-term; 
(b) higher government’s income due to wider tax compliances post the stabilisation following DeMo and GST effects; and 
(c) increasing possibility of NDA’s re-election in 2019.

Finally, back-to-back reforms made by the current central government in last three years made it possible, which can bring many advantages for our economy and companies as a whole. The benefits are enumerated hereunder.

Interest Cost to Move Southwards Further

Higher sovereign rating by international rating agency always ensures low cost of foreign borrowings as better rating helps in boosting confidence among the foreign lenders. Though foreign borrowings (External Commercial Borrowings) have always been cheaper for domestic companies, a rating upgrade will result in further cut in lending rates. There are a number of debt-laden companies operating in India (mainly due to capital intensive business model), who have already drawn foreign loans in their books. We expect these companies would be the major beneficiaries, as they can get these loans refinanced at lower rates.

Adding Strength to Bond Market

Soaring oil prices and upward trajectory of inflation led to recent turbulence in bond markets, which led to benchmark yield above 7% and narrowed the spread between Repo and yield below 100bps. This could have been tumultuous for the economy, as shrinkage in spread indicates reversal of interest rate cycle. However, higher sovereign rating is expected to lower the yields on government securities. Notably, recapitalisation bond of Rs1.35trln, if finalised, is likely to create excess supply in the near-term, which may lead to firming of benchmark yields,  in our view.

INR to get Support with Acceleration in Fund inflows

Boost of confidence among the foreign investors may result in increased inflow of foreign capital into the country through bond and equity markets, which might lead to a stronger INR. A depreciating INR is not good for the country especially when there is an upward movement in oil prices. We understand Re1 depreciation against Dollar can bloat India’s crude import bill by Rs1.5-2bn, which would eventually lead to higher fiscal deficit. Though depreciating INR is a boon for export-driven companies, a stable INR is more necessary for India at present in order to drive private capex.

Industries to be Benefited

Capital-intensive industries i.e. Infrastructure, Metals, Utilities, Capital Goods, Telecom, might be the major beneficiaries, as the companies operating in these businesses will be able to source funds at lower rates. Further, Banks and NBFCs are also expected to be benefited with the likely decline in general interest rates.

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