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Why Moody’s declined an upgrade for India’s debt ratings?

Why Moody’s declined an upgrade for India’s debt ratings?

By Vyomi Chheda

On Wednesday, Moody’s Investor Service stood strong on its stand that India’s foreign ratings, despite the economic and institutional reforms, cannot be improved. Since 2014 the Modi Government has undertaken several measures and enacted many reforms. However, according to the agency the results of the same are yet to be seen. Thus, they stand by their “Baa3” ratings for the country. Baa3, is the lowest investment-grade rating, but with a “positive” outlook.

Following Standard & Poor (S&P), Moody’s becomes the second rating agency to decline the upgrade for India’s debt ratings.

The credit agency welcomed economic and institutional reforms introduced under Modi. They felt that they “offer a reasonable expectation that India’s growth will outperform that of its peers over the medium term.”

Moody's becomes yet another agency to decline an upgrade for India’s debt ratings

Moody’s becomes yet another agency to decline an upgrade for India’s debt ratings | Photo Courtesy: The Quint

However, Moody’s said,

The reform effort to date has not yet achieved the conditions that would support an upgrade

The country still needed to accelerate private investment in order to reduce the government’s debt burden. The rating agency is concerned about the cost of its debt burden. Also, a banking sector which is weighed down by $136 billion in bad loans. Moody’s also said that India’s debt situation was not as rosy as the government claimed. Indian banks were also a cause for concern, the correspondence Reuters showed.

Moody Vs Ministry

Finance ministry felt that Moody’s was not taking the steady decline in India’s debt burden into consideration.

The finance ministry questioned Moody’s methodology. They felt that it was not taking into consideration a steady decline in India’s debt burden in recent years. Hence, ignoring the countries’ levels of development when assessing their fiscal strength. They cited the examples of Japan and Portugal, which enjoy better ratings despite debts around twice the size of their economies. In India’s case, “while the debt burden lowered significantly post 2004, this did not get reflected in the ratings”, the ministry argued.

Better credit on India’s sovereign debt is a much-needed push for the government’s economic plans for India and to attract foreign investment. A higher rating would signify to bond investors that India was indeed creditworthy and would help to lower its borrowing costs.

In spite of meetings between the ministry officials and Moody’s and other correspondences, where each party argues their stand, Moody’s has been adamant on its rating for India citing “likely changes to be a few years away”. The two major rating agencies declining an upgrade in ratings leaves a question behind; Is India’s growth actually reflective of the picture created or merely a bubble?

Featured Image Credit:  Narada News
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