The decision by Moody's is a shot in the arm for Prime Minister Narendra Modi's government and the reforms it has pushed through, and comes just weeks after the World Bank moved India up 30 places in its annual ease of doing business rankings.
Along with the rating upgrade, the Moody's also changed the outlook for India's rating to stable from positive.
Moody's upgrading India's sovereign credit rating is a recognition of a series of reforms undertaken by the government, Commerce and Industry Minister Suresh Prabhu said on Friday.
Moody's also upgraded ratings for a slew of public sector companies - State Bank of India, Export Import Bank of India and Indian Railways Finance Corporation - and the private sector lender HDFC Bank on Friday.
Moody's Investors Service upgraded India's sovereign rating today to Baa2 from Baa3 with a stable outlook. "The reform program will thus complement the existing shock-absorbance capacity provided by India's strong growth potential and improving global competitiveness".
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Moody's gave a thumbs-up to the reform agenda, which are seen to include demonetisation, and said that efforts to reduce corruption, formalise economic activity and improve tax collection and administration, including through demonetisation and GST, both illustrate and should contribute to the further strengthening of India's institutions "On the fiscal front, efforts to improve transparency and accountability, including through adoption of a new Fiscal Responsibility and Budget Management (FRBM) Act, are expected to enhance India's fiscal policy framework and strengthen policy credibility", it said. Moody's upgrade, its first since January 2004, moves India's rating to the second lowest level of investment grade. Radhika Rao, an economist at DBS, said implementation of reforms, a subdued rural sector and weak investment have slowed economic growth while rising oil prices have raised the risks.
For this improvement in the ranking, Moody's have mentioned the ongoing economic reforms initiated by the present Govt.; and this means that PM Modi's decisions regarding demonetization and GST has received an worldwide approval. "In fact, always the question was why the rating upgrade wasn't happening", said Mr Kumar. "It will boost the inflow of foreign direct investment and is good for equities and the exchange rate".
"However, as disruption fades, assisted by recent government measures to support SMEs and exporters with GST compliance, real GDP growth will rise to 7.5% in FY2018 (2018-19), with similarly robust levels of growth from FY2019 (2019-20) onward". "In the economic survey presented earlier this year, the government criticised ratings agencies for not giving India an upgrade".
Can Moody's India upgrade be considered an endorsement of PM Modi's economic reorganization?
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