The joomla behind Moody' Baa2 revision has markets cheering and investors chirpy

Last Updated: Fri, Nov 17, 2017 18:34 hrs
Moody

No longer had the news of Moody's Baa2 revision broken in the wee hours on a busy ​Friday, the markets started rallying. There was expectation for a good jump with most Asian markets providing ample cues for a positive session.

The latest report revises India's government bond and currency rating from a Baa3 status to a Baa2.

This is the latest in a decade that a top-3 rating agency has revised the sovereign rating. India's last rating upgrade, was during January 30, 2007, when S&P (Standard & Poor​'​s) upgraded India to BBB (-). Fitch, the other big rating firm had upgraded India to BBB(-) in August 2006 and has not changed its rating since the last 11 years.

Moody's had during 2004​, when the Vajpayee government was in charge,​ revised ​India's ​ratings to Baa3. Baa3 and below ratings were considered as junk status.

​It must be noted that​ Moody's report ​comes in the wake of Jaitley's statements that investments have risen in the country post the GST and demonetisation reforms.

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​A few minutes and the Sensex was trading upwards of ​4​00 points, while the NSE Nifty50 managed a 1​2​0​-plus point​s​ gain. Most indices on the BSE as well as NSE were trading at an over 1% gain.

The Baa2 upgrade led the India​n​ ​r​upee opening positively against the dollar in early trade. The ​r​upee gained an early 60 paise for 64.72 per dollar vis-a-vis the previous close of Rs 65.32 per dollar. ​It closed the week at Rs 65.02 to the dollar.​

A positive mood was observed on 10​-​​year bonds too. Bond yields and prices move in opposite direction.

What Moody's says:

Moody's official release revises ratings for India's government bonds from Baa3 to Baa2. The agency also revised ratings for currency, and a handful companies.

Foreign-currency bond ceiling was revised to Baa1 from Baa2, and the long-term foreign-currency bank deposit ceiling to Baa2 from Baa3, suggested the release. Moody's conceded that initiatives such as GST, demonetisation, Aadhar system, Direct Benefit Transfer were positive factors.

The sovereign upgrade saw an auto-revision for companies such as National Highways Authority of India, GAIL, NTPC, Bharat Petroleum, BPRL International, HPCL, Indian Oil Corporation, ONGC, and Petronet LNG.

Although GDP had slipped to 6.7% during end of FY18, Moody's believed that real GDP growth would rise to 7.5% by end of FY19.

Arvind Subramanian, the Chief Economic Advisor took to twitter suggesting that the rating revision was long awaited. He tweeted an Economic Outlook and Policy Challenge chapter from the Economic Analysis report saying "long overdue as our analysis showed."

Subramanian had long suggested that ratings remained "inconsistent" and even compared with China's fundamentals. He said six months ago that China's ratings were upgraded to AA- in spite of clear indications of its fundamentals deteriorating.

SIGNIFICANCE

Rate revisions from agencies such as Moodys, S&P (Standard & Poors) and Fitch ratings are more or less considered an indication of where a country's economy is headed.

Arvind Chari, Head-Alternatives at Quantum advisors was quick to add that rating changes are usually slow, and hence a rating revision is a sure signal of rising investment grade. In this case it has taken constant communication from governments (both the current as well as former) to ​earn the​ rate revision.

Inspite of the sudden frenzy there however lies a rider. Moody's suggests a caution on India’s high Debt/GDP ratio which could potentially rise in the coming ​two years owing to slower growth, and concerns fixed by bond issuances like Uday Bonds (Power distribution), Farm Loan waivers (potentially to be funded by issuance of bonds). The ​big ​bank ​r​ecap​italisation programme​ (to be funded by bank recap bonds), also finds a mention here.

FII inflows are expected to rise with the announcement, said Arun Thukral the MD & CEO at Axis Securities. He also suggested that reforms reduced a risk of sharp increase in debts, even in cases of potential downside scenarios.

He adds, "they [Moody's] have indicated further upgrade if there are material strengthening in fiscal metrics, recovery in investment cycle supported by additional reforms.... It will bring down the cost of overseas borrowings for Indian corporates esp. the ones with high-cost domestic debt on their books."

It will have a positive impact on Indian banking system, corporate borrowing programmes and initiate the much awaited private capex cycle. This will further add a fillip to FII inflows towards Indian equity markets.

Chari however ​says ​that pressures on the fiscal front ​remain ​with a likelihood that the government may not be in a position to meet this year’s and next year’s fiscal target, ​and this probably means that ​the rating upgrade seems to have come at a wrong time.

Chari added, "​M​arkets should worry that the Government now having received the rating upgrade, may actually slacken and relax its commitment to reducing fiscal deficit, as per the stated plan. Especially, at a time when investors seem to be worrying about the same as reflected in the increase in bond yields of more than 50 bps since August 2017.​"​

Speaking of bond markets, he suggested, that the rating could reverse negative sentiments in the bond markets. But he remained cautious of expecting foreign flows. "Bond limits to invest remains almost fully utilized and equities continue to remain over-valued."

He also forecasts that Indian Rupee will remain in the broad average range of Rs 64-67 to the US Dollar, while bonds may remain over sold and attractive at around the 7% mark. "Any large move down in bond yields would come through only on explicit clarity on the fiscal condition," he adds.

Abheek Barua, the Chief Economist at HDFC Bank conceded that the rating change may linger for 30-60 days. He also hinted that the rating change could be adopted by others, Fitch and S&P.

"Rating upgrades by even one agency send out a strong signal as they are expected to be followed by rating changes by other agencies in the future. There is usually little disconnect/conflict between the different agencies in terms of rating grades."