©2015 Bloomberg News
Sharon Chen

(Bloomberg) — India’s credit rating outlook was raised to positive by Moody’s Investors Service, signaling optimism in the efforts of Prime Minister Narendra Modi and central bank chief Raghuram Rajan to improve Asia’s No. 3 economy.

The country’s Baa3 rating was affirmed and the outlook was revised from stable, Moody’s said in a statement Thursday in Singapore. India is rated the lowest investment grade, on par with Indonesia, Iceland and Turkey.

“There is an increasing probability that actions by policy makers will enhance the country’s economic strength and, in turn, the sovereign’s financial strength over coming years,” Moody’s said. “India has grown faster than similarly rated peers over the last decade due to favorable demographics, economic diversity, as well as high savings and investment rates.”

While recent government recalculations of gross domestic product have blurred assessments of how the economy is faring and perplexed Rajan, foreign funds have poured more into Indian stocks and bonds in 2015 after a record $42 billion in 2014 and the benchmark S&P BSE Sensex index has risen more than 25 percent in the past year. Policy makers are putting in place the right measures to address inflation and increase investment, Moody’s said.

“It’s an endorsement of both Modi and Rajan,” said Vishnu Varathan, a Singapore-based economist at Mizuho Bank Ltd. India’s growth and rating outlook have “benefited from the kind of confidence that Governor Rajan built in the rupee and in inflation anchoring, as well as what the Modi administration’s doing in terms of the fiscal steps they’ve taken.”
Rate Pause
India’s central bank left interest rates unchanged this week after unscheduled cuts that put India in the group of almost 30 central banks easing monetary policy this year. Rajan’s pause reflects a desire to ensure inflation stays below a target of 6 percent by January.

“Recent measures to address inflation, keep external balances in check, simplify the regulatory regime for investors, increase foreign direct investment, and facilitate infrastructure development will reduce some of India’s sovereign credit constraints,” Moody’s said. “The ability of policy makers to strengthen India’s sovereign credit profile to a level consistent with a higher rating will become apparent over the next 12-18 months.”

Official data show conflicting signs that growth is taking off even as the government forecasts a 7.4 percent expansion in the last fiscal year, matching China as the world’s fastest growing major economy. While company earnings are bottoming out and car sales are picking up, February exports fell the most since 2009 and credit growth is at the lowest in more than five years.
Higher Growth
Moody’s said India’s growth will probably remain higher than that of its peers, supported by “relatively benign global commodity prices and liquidity conditions.”

“The Baa3 rating incorporates the risk that higher levels of growth and infrastructure development will be accompanied by higher leverage,” it said. “Sovereign credit improvements over the next 12-18 months will depend on the extent to which growth, policies and buffers can contain the risks associated with rising leverage.”
–With assistance from Iain McDonald in Sydney.
To contact the reporter on this story: Sharon Chen in Singapore at schen462@bloomberg.net To contact the editors responsible for this story: Stephanie Phang at sphang@bloomberg.net Rina Chandran