Four months after global rating firm Standard & Poor’s downgraded India’s rating to the junk status, its rival Moody’s Investors Services upgraded India’s country ceiling for foreign currency debt to ‘Ba1’, the top of the speculative grade, from ‘Ba2’ due to a substantial improvement in the external liquidity position. The upgrade, which came ahead of the Budget later this month, would benefit corporates which should be able to raise funds at lower spreads over benchmark LIBOR (London Inter-Bank Offered Rate). “Foreign portfolio investors who have been looking favourably at India following the recent liberalisation in forex laws will have greater confidence following the upgrade,” said an analyst. ‘Official foreign reserves have expanded rapidly during the past year as increased merchandise exports, dynamic sales of information technology services, and large workers’ remittances helped move the current account into surplus while capital inflows also mounted,’ Moody’s said, adding, ‘Moody’s expects that the factors bolstering India’s external liquidity are likely to be sustained over the next two to three years’. The issuer ceiling, the proxy for the rating that would likely be assigned were the government to sell a foreign currency-denominated bond in the international capital markets, was also raised to Ba1 by Moody’s. However, Moody’s said concern about the poor state of India’s public finances continues to warrant a negative outlook on the government’s Ba2 domestic currency rating. Moody’s also upgraded India’s country ceiling for foreign currency bank deposits to ‘Ba2’ from ‘Ba3’, unifying it with the government’s Ba2 domestic currency debt rating, which was not on review and was affirmed with a negative outlook. ‘The upgraded ‘Ba2’ bank deposit ceiling was assigned a negative outlook because of the close linkage between the risk of a government domestic debt restructuring and the potential for restrictions on large foreign currency withdrawals from the banking system,’ Moody’s said. The upgrade came at the same time as talk surfaced this month of a loan or possible first ever dollar bond issue from India and Moody’s said its rating would apply to any issue that came. India, which has no Eurobonds and has $72.4 billion of foreign exchange reserves and just $98.1 billion in foreign debt, has been reported to be in talks with banks over a loan or possible bond to refinance some of its multilateral debts. On September 19, 2002, S&P had downgraded India’s local currency rating to junk bond status. The S&P then cited poor finances of India’s public sector and its growing debt burden, the setback to reforms and put a question mark over the government’s credibility on reforms. ‘The Moody’s move was expected. They had indicated it earlier. But it does indicate that the country’s economic fundamentals have improved. The foreign exchange conditions have improved for the last 12-18 months. The move also shows that the existence of some negatives such as a high fiscal deficit may not necessarily mean that the economy’s fundamentals are not good. This move should give foreign investors the confidence that the Indian economy’s is doing fairly well,’ said an economist with a private sector bank. Said Sanjeet Singh, analyst at ICICI Securities: ‘This is a recognition of the Indian economy’s improving external liquidity. Forex reserves have grown sharply over the last year and this is likely to continue — though at a slightly slower pace — on account of robust inward remittances and solid capital flows. The upgrade also raises the possibility that the Reserve Bank of India will go ahead with its policy of liberalising the capital account. This will also improve the confidence of foreign investors buying Indian assets.”
