credit-ratings

Moody’s Investors Service, a global rating company, is a subsidiary of Moody’s Corporation and has offices across the globe. It is a leading provider of credit ratings, risk analysis and research covering various debt instruments and securities issued by corporate issuers, finance issuers, etc across more than 135 sovereign nations.

As per the newspaper reports dated 17.11.2017, Moody’s Investor Service has upgraded India’s sovereign local currency rating to Baa2 from Baa3 and its short-term local currency rating to P-2 from P-3 and has changed the outlook to stable from positive.

Moody’s Investor Service follows a process of gradation of credit worthiness indicated by the following rating symbols. This gradation may help the investors to know about the credit worthiness of an issuer and its country:

On the Global Long-Term Rating Scale-

  1. Aaa – indicating lowest level of credit risk,
  2. Baa – indicating moderate credit risk and may possess certain speculative characteristics,
  3. Caa – indicating very high credit risk, etc.

On the Global Short-Term Rating Scale-

  1. P-1 – indicating a superior ability to repay short-term debt obligations,
  2. P-2 – indicating a strong ability to repay short-term debt obligations,
  3. P-3 – indicating an acceptable ability to repay short-term obligations, etc.

Generally, international credit ratings relate to either local currency or foreign currency commitments:

  • The local currency international ratings measure the likelihood of repayment of debts and other financial commitments in the currency of the jurisdiction in which the issuer is domiciled;
  • The foreign currency ratings additionally take into account the risk involved in conversion of local currency into foreign currency or in making transfers between sovereign jurisdictions.

Moody’s Investor Service has stated the rationale behind upgrading India’s rating. It has cited certain Government measures including those listed below which may help in improving the business environment, enhancing the productivity, reducing the high debt burden on the economy, and encouraging increased investments from across the world, thereby leading to a strong and sustainable growth of the economy:

  1. Adequate support to small scale businesses and exporters such as financial support to Micro Small and Medium Scale Enterprises (MSMEs), exemption from payment of Integrated GST (IGST) provided that exporters furnish a letter of undertaking which will act as a guarantee that if the exporters fail to export the goods and services or is they don’t receive payment for such exports, they will have to pay the IGST.
  2. Enactment of Insolvency and Bankruptcy Code 2016, which provides for fast track winding up of businesses and addresses the issue of overhanging non-performing loans in the banking system.
  3. Implementation of Demonetization 2016 (i.e. scrapping of old Rs. 500 and Rs. 1000 notes) to address the issue of black money, corruption and terrorism, and it has also seen a rise in use of digital money, e-modes of payments, etc.
  4. Implementation of Goods and Services Tax (GST) 2017, which may help in removing barriers to interstate trade, reducing the cost of tax compliance, logistics cost, transaction cost, etc.

Moody’s Investor Service has further stated that although some major reforms such as implementation of GST and demonetization may have adversely affected the growth of the economy for a short term, but it may take time for their impact to be seen. Moreover, from a long term perspective, it said that the potential for growth of the Indian economy is significantly higher than most sovereign nations.

This upgraded rating of India by Moody’s Investor Service may further encourage global investors to make investments in India and thereby improve the business climate in India and ultimately promote strong and sustainable growth of our economy.

 

Harini Daliparthy

Legal Associate

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