Reuters | Mon Jul 26, 2010 | 12:19pm IST
Moody’s Investors Service raised the rating on local currency debt to one notch below investment grade at "Ba1" with a positive outlook, citing improving public finances due to recent government reforms. "The upgrade … was prompted by the Indian government’s adoption of a medium-term fiscal consolidation strategy, which is supported by a broadening structural reform program," said Aninda Mitra, Moody’s vice president and lead sovereign analyst for India. India is set to lower its fiscal deficit to 5.5 percent of GDP for the current fiscal year that began in April from a revised 6.9 percent in the last fiscal year.
The upgrade narrowed the gap by a notch between the local currency debt and its foreign currency rating, which was kept at "Baa3′ — the lowest investment grade rating. The outlook on its foreign currency debt is stable. However, markets shrugged off the action on the eve of the RBI’s policy review though some analysts said it could be positive for capital flows once risk appetite picks up. "It is more a catching up as despite this upgrade India’s local currency rating is still in the speculative grade while S&P and Fitch already have it in the investment grade," said Anubhuti Sahay, an economist at Standard Chartered Bank in Mumbai.
Moody’s said it could consider unifying India’s local and foreign currency ratings should the fiscal reforms deepen and if inflation pressures normalise. The Reserve Bank of India (RBI) will review monetary policy on Tuesday, when it is widely expected to raise key rates by 25 basis points to rein in inflation that has stayed stubbornly high.