Some may call it a minor event, while others may boast of it as an achievement. Nonetheless, one can’t ignore the fact that, Moody’s——a world-renowned credit rating agency——has upgraded India’s rating from “Baa3” to ‘Baa2’. It has changed its outlook on India from ‘stable’ to ‘positive’. This is a shift that perhaps has arrived right on time. Investors were worried about the weakening of Rupee, rising crude oil prices, and potential inflation shocks. Moody’s rating upgrade will help India reduce its borrowing cost on US$ denominated debt and instil confidence among Foreign Institutional Investors (FIIs), who have been bearish on India for a while.

Are FIIs bearish on India?

(Source: ACE MF, PersonalFN Research)

What might have led Moody’s to upgrade its view on India?

• Government’s digital push
• Successful implementation of GST
• RBI’s focus on curtailing inflation to 4% over the medium term
• Decisive steps taken by the Government to address resolve the conundrum of Non-Performing Assets (NPAs) of Indian banks
• India’s improving competitiveness on ‘ease-of-doing-business’

Moody’s has upgraded India for the first time in last 13 years.

Commenting about this development Mr Sunil Bharti Mittal, the founder and Chairman of Bharti Enterprises said, "It (the ratings upgrade) clearly shows that the economy is turning the corner and poised for a big leap forward, highlighting the immense potential that India offers as a global investment destination. More importantly, it also emboldens the government to stay true to the path of strong and transformational reforms in the coming days."

Surprisingly, India’s fiscal deficit hit a four-year high in the June quarter. Thus, the recent upgrade also raised many eyebrows.

Expressing his concerns, Mr Arvind Chari, Head of Fixed Income & Alternatives at Quantum Advisors, said that, “The ratings upgrade seems to have come at a wrong time as the government is facing pressures on the fiscal front. Ratings changes are very slow, infrequent and at most times move with a lag to market expectations.”

"Markets should worry that the government now having received the ratings upgrade, may actually slacken and relax its commitment to reducing fiscal deficit, as per the stated plan - especially, at a time when investors seem to be worrying about the same as reflected in the increase in bond yields of more than 50 bps since August 2017”, he added further.

What’s the impact on investors of this rating upgrade?

Stock and bond markets have reacted positively to the recent ratings upgrade. Rising stock prices and falling yields have rekindled hopes among investors. Ratings upgrade seems to have arrested the depreciation of the Rupee at least for the time being.

However, investors shouldn’t ignore these factors:

• GDP growth is flagging
• Industrial activity still looks unstable
• Inflation is trending up again
• Trade deficit has widened
• Fiscal slippages are possible
• Indian rupee has weakened against the US dollar
• Employment rate is poor

Mr Dhawal Dalal, CIO of Fixed Income at Edelweiss Mutual Fund, reacted saying, “The market was extremely bearish the last couple of days (immediately preceding the day of announcement) which caused the benchmark 10-year to cross 7 per cent. But as we speak the yields are down 10 basis points. This is good news for long-term bond funds." 

Expressing positive views Rajat Jain, CIO of Principal Mutual Fund commented, "The rating upgrade by Moody's brings a positive sentiment to the market. The equity markets are reacting to the sentiment. We are hopeful of a change in interest rates in the debt markets." 

Mr Nilesh Shah, MD of Kotak Mahindra Mutual Fund, tweeted, "Moody's mood changes to upgrade India rating. Recognition for recent economic reforms in India & 5000 year track record of no default. Let's hope that poor standards also gets richer."

What investors should do?

Investors should avoid chasing the market momentum. They might remain in the celebration mode for a while.  But, unless India successfully deals with tougher issues such as job creation, rising fiscal deficit, and flagging growth, markets may not go the distance. Upgrades by other independent rating agencies such as Fitch and S&P are unlikely at the moment, considering the severity of problems India faces today.

Investors looking to capitalise on the opportunities in the equity market should take a SIP (systematic Investment Plan) route and avoid making bigger commitments at a time when the markets are close to an all-time high. Your investments should be in sync with your risk appetite and financial goals.

While you invest in debt funds, you should mind your time horizon. Debt funds aren’t risk-free.

You should stick to mutual fund schemes that have a proven track record across timeframes and market phases.

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