Moody’s and its moods!!!

about 16 days ago
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On Tuesday, the rating agency changed India’s sovereign rating outlook from ‘negative’ to ‘stable’, while affirming the country’s foreign-currency and local-currency long-term issuer ratings at Baa3.  This is good but just to get this into perspective – we are a merely one rung above junk.

Last year, Moody’s downgraded India’s sovereign rating from ‘Baa2’ to ‘Baa3’, the lowest investment grade. Did that really impact us? Jio has got foreign investment even in these dark times; what does that mean? If there is an opportunity, companies will come calling.

We have time and again questioned the relevance of these agencies. Rating agencies are like up there on a pedestal; no one dare touch them. And they have been taking umbrage in the fact that their ratings are “opinions” and it is all about freedom of expression and this defense for so many years cannot just be pulled down. But the very logic of these rating agencies work comes into question. Even though the rating agencies vouch for “objectivity” it obviously loses that objective many times.

Post the 2008 collapse most banks and trading floors have stopped depending on official bond ratings. In fact, BlackRock, one of the largest investors of US Federal bonds does its own analysis and does not rely on these rating agencies. Just as banks have stopped relying on Libor, these rating agencies have lost their relevance long time ago. They are mere “technicalities”.

And to think that we Indians and the Indian Govt worry about what S&P and Moody’s or Fitch say?  But the good part here in India is that at least that fear of “international image” gets the Govt working.

So, why did it upgrade now? The reasons cited -  a recovery is underway with downside risks to growth from subsequent coronavirus infection waves getting mitigated by rising vaccination rates. The rating agency expects India's real GDP to surpass 2019 levels this fiscal year, FY22, rebounding to a growth rate of 9.3%, followed by 7.9% in FY23.

And today, two days later, when the markets are up, punters are quoting Moody’s upgrade as a reason? ‘Tubelight’ reaction? 

We all can discern this much – this is good news; an upgrade is always a good thing. But do we really know what this upgrade actually means?

When a rating agency says that it is upgrading or downgrading, it is talking about India’s creditworthiness – it is a tag which will indicate to the world whether India will repay or whether it is a default risk.

Putting us up by one notch, Moody’s has conveyed to the world that India is good for lending and more importantly, this upgrade will bring down our cost of borrowing in the international market; simply put, as the risk factor is now lower, India can issue its debt at lower interest rates.

Another BIG factor is the perception of the FIIs. Currently, looking at the way in which Indians themselves are pouring money into the market, FIIs or no FIIs, it does not seem to be a bother. But this rating might help the FIIs see what we Indians saw all along – the long term story.

Moody’s upgrade will most certainly impact our international standing very positively.

Of course, when the punters need a respite, the already existing issues of unemployment, NPAs, poor private sector investment, environment, fiscal deficit, inflation, China, US Fed; everything will come to the fore like muck in dirty water.

But let’s look at things positively - over a period of time, if growth spurs and we are able to keep the third wave at bay, all these issues too will get slowly resolved. For now though, let us enjoy the joy of an upgrade!

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