Moody's upgrades Indian bonds, pegs GDP below 7%

Global agency Moody's on Wednesday upgraded the credit rating of Indian government's bonds from speculative to investment grade, a move that could encourage foreign institutional investors to increase their exposure in gilts and help companies raise funds from abroad at competitive rates.

"Moody's has upgraded the rating on long-term government bonds denominated in domestic currency from Ba1 to Baa3 (from speculative to investment grade)," said a Finance Ministry release.

Giving rationale for the upgrade, Moody's said, "Diverse sources of Indian growth have enhanced its resilience to global shocks".

It added the present slowdown "could reverse sometime in 2012-13, as inflation cools from current 9 per cent levels".

The upgrade, said Thomas Mathew, joint secretary in the capital markets division of Department of Economic Affairs 'will encourage FIIs to look at India as a favourable investment destination'.

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The same rating agency, however said India's GDP growth rate would go below 7 per cent in the current fiscal from 8.5 per cent a year ago.

The rating agency cited policy paralysis and global uncertainty as the reasons.

"In the last few months, tight monetary conditions and a cloudy global outlook have combined to reduce manufacturing output and investment initiatives.

"We expect growth to fall below 7 per cent in 2011-12 from 8.5 per cent in 2010-11 due to the impact of an uncertain global funding environment, high domestic interest rates and the apparent lack of policy initiatives that can revive business confidence," Moody's said in a report.

While a growth rate between 6 per cent and 7 per cent this year would be lower than India's 8.5 per cent average over the last five years, it would still be higher than the median for 'Baa3' rated countries, it said.

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"Our expectation is that supported by current levels of savings and investment, growth will revive over the medium-term, thanks to continued productivity enhancements in the private sector, increased infrastructure investment boosting potential output, policies to alleviate poverty and income inequality that will support domestic demand growth and demographic trends raising the working age population while keeping the dependency ratio low," it said.

As per the latest official estimate, the country's economy is expected to expand by 7.5 per cent in 2011-12.

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Meanwhile, Moody's has unified the government of India's local and foreign currency bond ratings at Baa3, indicating investment grade.

The outlook on the rating is stable, Moody's Investors Service said.

The guidance was based on an analysis of sovereign defaults in the last two decades, which does not offer empirical justification for a ratings bias in favour of either local currency or foreign currency government debt, it said.

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The stable outlook on India's rating reflects Moody's medium-term assessment of the country's growth, fiscal and balance of payments outlook relative to other countries it rates, it said.

It also said there seems to be no impact on the debt rating of 16 Indian financial institutions and some large state-owned companies following its action to unify the sovereign's local currency and foreign currency government bond ratings at 'Baa3/P-3' with a stable outlook.