Credit Rating Agencies and India’s Sovereign Rating

In News

• Credit ratings agency ‘Moody’s’ has changed India’s sovereign rating outlook from ‘negative’ to ‘stable’.
  • It also affirmed the country’s foreign-currency and local-currency long-term issuer ratings at Baa3.
  • In 2020, Moody’s downgraded India’s sovereign rating from ‘Baa2’ to ‘Baa3’, the lowest investment grade.
    • It stated the following reason behind last year’s move.
      • Challenges in implementation of policies to mitigate risks of a sustained period of low growth
      • Deteriorating fiscal position. 
    • The outlook on the last year rating was kept negative.

Reasons behind upgrade in the rating agency’s outlook

• High Capital Cushion and Greater Liquidity:
  • Bank provisioning has allowed for the gradual write-off of legacy problem assets over the past few years.
  • In addition, banks have strengthened their capital positions, pointing to a stronger outlook for credit growth to support the economy.
  • Both will strengthen banks and non-bank financial institutions which now pose much lesser risk to the sovereign than previously anticipated.
• Positive Economic Environment:
  • Risks stemming from a high debt burden and weak debt affordability remain.
  • Still the economic environment will allow for a gradual reduction of the general government fiscal deficit over the next few years.
    • Hence it is expected that the sovereign credit profile will not  further deteriorate.

Steps taken by India to strengthen the Banking System

• Recovery of Bad Loans:
  • In the last 6 financial years, banks have recovered Rs. 5.01 lakh crore of bad loans, enabling them to improve their financial metrics.
• Capital Infusion in Banks by Government:
  • The government has infused Rs 3.06 lakh crore in state-owned banks in five years between 2017-18 and 2021-22.
• Creation of National Asset Reconstruction Company Ltd (NARCL):
  • Government has also taken a series of reforms to strengthen banks, improve debt resolution and recovery.
  • Recently, the government approved extending a guarantee of Rs 30,600 crore to the National Asset Reconstruction Company Ltd (NARCL).
    • It will help to clear the banking sector’s stressed assets of around Rs 2 lakh crore in a time-bound manner.

Moody’s assessment on growth

• V Shaped recovery of Indian Economy:
  • Following a deep contraction of India’s real GDP is expected to surpass 2019 levels this fiscal year.
    • It was 7.3 percent in the fiscal year ending March 2021, and is expected to rebound to a growth rate of 9.3 percent this year. 
    • It will be followed by 7.9 percent in fiscal 2022.
• High Real GDP Growth Rate at around 6 per cent:
  • Looking ahead, Moody’s expects real GDP growth to average around 6 per cent over the medium term.
• Underestimation of Data by Moody’s as per Experts:
  • Some analysts argued that Moody’s has underestimated India’s potential of real GDP expansion in the medium term.

What is the impact of the upgrade?

• Lower Borrowing Costs:
  • Since overseas borrowing costs are tied to 
    • a country’s rating and 
    • the agencies’ outlook on the nation, 
  • An upgrade usually helps in lowering borrowing costs for the government as well as the corporate sector. 
• Increase foreign investors:
  • Foreign investors take comfort in subscribing to government and corporate bonds at lower rates because
    • Chances of default recedes.
    • Overall debt service ability increases with better ranking.

Source: IE