One of the world’s largest ratings agencies, Moody’s Investors Service, upgraded India’s sovereign rating on 17th November 2017. This triggered a rally in the market with benchmark indices Sensex and Nifty rising over 1%.
The upgrade raised India’s sovereign rating from Baa3 to Baa2. This is the first upgrade India has received from the agency since 1991. In that year, Moody’s downgraded India due to its ongoing financial crisis. The agency also changed India’s ratings outlook from ‘stable’ to ‘positive.’
With a Baa2 rating, India is now at par with Italy and Spain which have much higher levels of public debt. The agency praised the Modi Government’s initiatives to widen the tax base, to tackle non-performing loans, and the introduction of Goods and Services Tax (GST). It also took positive note of the Government’s demonetisation exercise, as a measure to move the informal sector to the formal economy.
In 2015, Moody’s had changed its outlook for Indian banks to stable from negative. India’s Government Debt to GDP ratio stands at about 68%. Moody’s highlighted the large pool of private savings available in India to finance it.
The other two ratings agencies, S&P and Fitch still place India on the lowest investment grade rating on their list. However, the change in the Moody’s rating may influence their future decisions.
What it means
For Debt Fund Investors
The ratings upgrade is likely to lower the borrowing costs for the Indian government and corporate sector. The Indian Government’s benchmark 10-year bond yield (effectively the interest rate it pays) currently stands at 6.92% and has been rising steadily since August 2017. A higher bond yield implies rising borrowing costs and lower prices for bonds. This, in turn, implies lower returns on most debt mutual funds. The bond yield reversed course after the upgrade.
Moody’s upgrade provides some respite to bond investors who were hit hard by the recent rise in bond yields. However, it is too early for debt investors to conclude that bond yields will head lower from here on. Debt fund investors should stick to categories that are less interest rate sensitive such as short-term debt funds.
For Equity Fund Investors
The lower borrowing costs for companies are likely to spur investments and translate into higher corporate earnings. Equity investors thus stand to gain, a key reason for the market rally on the day of the upgrade announcement.
The Moody’s upgrade cements the positive case for Indian markets. However, you should not invest lump sums solely on account of this news. Keep an eye on future ratings announcements and also on the Government’s fiscal deficit which is a key factor.