Moody's an International Rating Agency has just upgraded India's Sovereign Rating from Baa3 to Baa2. This is the first rating upgrade since 2004. Naturally the stock markets reacted positively and stocks, bonds and even the rupee rallied. Moody's upgrade has come as a massive boost to the Modi Government, which was facing fire from the opposition and critics over Demonetization and GST.
Just 18 days back on October 31st, the World Bank released the Doing Business Report. India jumped 30 places from 130 to 100. Now, Moody's has upgraded India's Sovereign Rating. Can the Modi Government get a bigger boost saying its reforms were a success?
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You must be wondering why Moody's has upgraded India ratings. These 5 reasons should give you the answer.
If you take a look at the IMF World Economic Outlook October 2017, you will find that India is expected to surpass countries like Malaysia, Indonesia and even China in terms of GDP growth in 2018.
India currently has low inflation and low interest rates. Even though consumer spending and investment is low after demonetization, low interest and low inflation has helped maintain a stable economy.
After Demonetization and the launching of GST the economy slowed down. However, the Modi Government's moves promoting exporters and SMEs has yielded results. The real GDP growth (GDP which accounts for inflation), is expected to rise to 7.5% in FY 2018. This rate of growth is much higher than other Baa-rated Sovereign economies.
The Modi Government has taken concrete steps towards reforming the banking sector with the Insolvency and Bankruptcy Code (IBC) and also looks to resolve NPAs (Non Performing Assets) in the banking sector. GST could increase the tax base and propel the Indian economy towards a GDP growth of 8-10%.
India is enjoying a consumerist economy, thanks to the rising influence of digital media. Today, Indian citizens enjoy a very high purchasing power. India's per capita income was Rs 1,03,219 for FY 2016-17. The per capita income is rising rapidly. India's private consumption is also growing and is expected to touch $2 Trillion by the year 2022.
You and other citizens are spending heavily and this is helping the food, housing, consumer durables, telecom and logistics sectors.
The RBI has set a medium term CPI (Consumer Price Index) target of 4%, within a band of +/-2%. India's retail inflation (CPI) was 3.28% for the month of September and 3.58% for the month of October.
With inflation well under control, Moody's had no choice but to upgrade India's rating.
Moody's has viewed demonetization positively and says demonetization will destroy corruption and improve tax collection in India. GST will help formalize the economy and increase the tax base.
Demonetization and GDP will help improve Indian Institutions.
Finally....Prime Minister Narendra Modi wants BRICS (Brazil, Russia, India, China and South Africa) to set up their own rating agency to counter Western rating agencies. Currently S&P, Fitch and Moody's control over 90% of the Sovereign ratings market. This could have served as a wakeup call to Moody's. Be Wise, Get Rich.
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