What Moody’s Rating Upgrade Means For India: BQ Explains

Some have said it was overdue, while others wonder whether it has come too early. But, as the dust settles after Moody’s rating upgrade of India that set markets abuzz, there are also questions being asked about the potential implications.

Borrowing Costs

The immediate, and most important, result of the upgrade is that India’s borrowing cost will reduce in global markets. Here’s why:

A credit rating is a measure of the credit worthiness of a borrowing entity, whether a sovereign or a company. Simply put, it is tag that tells a potential lender how likely it is that the borrower will default on payments.

Moody’s, by upgrading India’s credit rating by one notch to Baa2 from the earlier Baa3, has indicated that it believes India’s credit worthiness has improved since it last conducted a review.

Read the details of Moody’s assessment here.

The immediate implication of the move is a lowering of the risk premium that India will have to pay. What that means is that India can now command a lower interest rate for the debt that it issues.

The rating of companies that are domiciled in India will also benefit, as no company’s rating can be higher than the sovereign’s. Therefore, an upgrade of the highest rated companies that currently tap the international bond markets will likely follow soon.

Fund Flows

Investment by foreign institutional investors (FII) into India’s equity markets have been relatively muted this year compared with the flows into the debt market. With inflation having been brought down, the high real rates have proved lucrative for these investors.

As of October 2017, FIIs have made a net investment of Rs 1.05 lakh crore in the Indian debt market and Rs 6,094.24 crore in equities. This is a complete reversal from the same period last year, where FIIs had invested Rs 9,216.48 crore in debt and Rs 41,334.24 crore in equities.

With Moody’s assessment that India’s growth prospects in the medium term are strong, international investors, that have already been viewing India with significant interest, are likely to be even more enthused.

The inflows into the debt markets though are not likely to be torrential as FII limits for government bonds have already been reached.

Relative Standing

With the upgrade, India now stands second in the pecking order among its BRICS peers.

What’s interesting, though, is that India has been upgraded while some of its peers have been downgraded. Brazil’s rating currently stands at Ba2, the lowest in the pack. One notch higher is Russia, at Ba1. Both these ratings are considered sub-prime by Moody’s.

India has now moved past South Africa, which was downgraded to a Baa3 from Baa2 in June by Moody’s.

China’s rating was also downgraded earlier this year to A1 from Aa3. The reason for the downgrade, as stated in a Moody’s report, was that China's financial strength is likely to erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows.