Global credit rating agency Moody's on Thursday raised India's sovereign credit rating to 'Baa2' from 'Baa3'. The agency has now changed India's outlook to stable from positive.
Markets cheer the upgrade as Sensex rallied over 400 points and the Nifty gaining 110 points. The rupee too opened sharply higher against the dollar at 64.67.
However, the latest move by Moody's surprised many as India no longer holds the status of world's fastest-growing major economy but the Narendra Modi-led government has every reason to cheer the developments as it comes as a boost to the steps Centre has taken to the front of economic and institutional reforms.
Following are the key points to know behind the upgrade from Moody's:
What is 'Baa3' rating?
The 'Baa3' rating was the lowest investment grade -- just a notch above 'junk' status.
Moody's has upgraded India's sovereign credit rating by a notch to 'Baa2' with a stable outlook citing improved growth prospects driven by economic and institutional reforms.
The upgrade comes on the heels of a recent survey by Pew Research which shows the prime minister Narendra Modi still remains "very popular".
Why the upgrade is important?
The rating upgrade comes after a gap of 13 years - Moody's had last upgraded India's rating to 'Baa3' in 2004.
What are the reasons behind the move?
The decision to upgrade the ratings is underpinned by Moody's expectation that continued progress on economic and institutional reforms will, over time, enhance India's high growth potential and its large and stable financing base for government debt, and will likely contribute to a gradual decline in the general government debt burden over the medium term," the ratings agency said.
However, it further warned about the high debt burden which remains a constraint on the country's credit profile.
"Moody's believes that the reforms put in place have reduced the risk of a sharp increase in debt, even in potential downside scenarios," it further said.
Which key reforms exactly impacted in the positive outlook?
Reforms like rolling out of the Goods and Services Tax, the announcement of demonetization, modifications in labour policy supported the Moody's upgrade.
"Key elements of the reform program include the recently-introduced Goods and Services Tax (GST) which will, among other things, promote productivity by removing barriers to interstate trade; improvements to the monetary policy framework; measures to address the overhang of non-performing loans (NPLs) in the banking system; and measures such as demonetization, the Aadhaar system of biometric accounts and targeted delivery of benefits through the Direct Benefit Transfer (DBT) system intended to reduce informality in the economy," it said.
What India needs to focus upon?
The agency said that India could face downward pressure if the health of the banking system deteriorated significantly or external vulnerability increased sharply.
