Implications of Moody's ratings upgrade for India

• Moody's upgrading India's ratings from 'Baa3' to 'Baa2' two days ago - even though a notch up but still remains in 'Investment grade-Moderate credit risk' band only. The rating outlook was only changed to 'positive' from 'stable'.
• However, Moody’s have put out a caveat that they will watch out for any deterioration of the fiscal situation or banking system. 
• S&P has stated that it will continue to keep India's rating unchanged.
• The only jubilation for BJP is that Manmohan Singh tried but couldn't get it. And Modi tried and failed in 2016, but could get it citing demonetisation and GST roll out as reforms now in 2017.
• India’s last upgrade by Moody’s was 13 years ago in 2004 to 'Baa3' from 'Ba1'. 
• From Jan, 1988 India had a credit rating of A-2, the highest investment grade rating it ever got. But on Oct, 1990, it was downgraded to Baa1 in the wake of India’s twin crisis of worsening balance of payments and fiscal indiscipline. On Mar, 1991, it was further downgraded two notches to Baa3, which was the last category of investment grade rating. On Jun, 1991, India plunged into the non-investment category at Ba2, a downgrade of two notches. From Jun, 1998 (in the aftermath of India’s nuclear tests in Pokhran) India remained classified in the non-investment or ‘junk’ category 'Ba2'. 

• In the last 13 years, investment flows from abroad have seen a steady rise and Indian companies have been borrowing more from overseas markets, though the terms of these loans could have been better with a higher rating from Moody’s. Nevertheless, a rating of Baa3 has really not come in the way of either more foreign investment or higher foreign borrowing. 
• On the back drop of botched demonetisation and badly implemented GST, Moody’s upgrade found it reassuring that the economic outlook is better now, thus puncturing the domestic narrative. But ground reality remains same that economy is in shambles and much needed to be done for its revival.
• Economic decisions should be analysed only from an economic point of view only. Seen through the colour of political ideologies, all kinds of biases creep in.
• For corporates, who are leveraged and have overseas borrowing, it will lower cost of borrowings. 
• The increased flow of foreign exchange into the country is likely to see appreciation of INR, which is already overvalued and impacts already stressed exports and surge in imports that might not augur well for current account deficit that has already widened to over 2% GDP.
• The combined fiscal deficit of states and the Centre is still in control at 6.4% of GDP in 2016-17 that gave the Moody’s some confidence in India’s ability to stay on the path of fiscal consolidation.
• If the health of the banking system does not improve in the next year or two, the risks of a downgrade may lurk once again.
• If oil prices rise and the government is not able to manage their consequences in the domestic economy properly, then the newly acquired rating could be subjected to a review.
• Moody’s has noted that the combined debt of the governments has risen to 68% of GDP, which is significantly higher than the median rate of 44% for all countries classified under the Baa group. While there are many other positive countervailing factors in India’s case, but further growth in debt can be a cause for concern.
• If elections could be won with the help of good economic news from international agencies, leaders of the BJP should consider themselves fortunate but elections are hardly won on external certifications.

Moody's upgrading India rating with a caveat and S&P maintaining status quo clearly indicates that Moody's had succumbed to intense lobbying by Modi & Co and hence this upgrading speaks out nothing and reaffirms domestic narrative that Indian economy is in shambles following botched demonetisation and badly rolled out GST. Now we can see Modi & BJP bombarding nation with high pitch campaigns that our economy is booming and targeting Congress with choicest abuses. Moody's decision of politics hurts its integrity and its ratings will be of no use going forward.