Moody’s Investors Service has upgraded India’s sovereign rating for the first time since 2004, citing continued progress in the nation’s economic and institutional reforms. The rating agency moved India's rating up by one notch to BAA2 from BAA3.

Explaining the rationale behind the upgrade, Moody’s said reforms being pushed by the government will help stabilize the debt and enhance the country’s growth potential. It was noted 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 Government has rolled out a string of reforms such as the GST, a new monetary policy framework, measures to check the banking sector’s bad loans ratios, demonetisation, the widely debated Aadhaar biometric system, and the Direct Benefit Transfer system. These reforms will reduce informality in the country, Moody’s report said. The rating agency noted that the recently introduced GST will promote productivity by removing barriers to interstate trade.

Moody’s acknowledged the short-term weakness in the economy, stating that it expects real GDP growth to moderate to 6.7 percent in the fiscal year ending in March 2018. However, as disruption fades, India’s GDP growth will rise to 7.5 percent, Moody’s said. “Longer term, India’s growth potential is significantly higher than most other Baa-rated sovereigns.” It, however, cautioned that high debt burden remains a constraint on India's credit profile.

The rating upgrade is extremely positive news for the country and will further bolster confidence in the economy. Reforms such as the GST and the public sector bank recapitalisation will begin to show its constructive side on the ground in another six months to one year once the initial disruptions die down, Ex RBI Governor Mr. Bimal Jalan said.

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