Will new Moody's ratings lead to investment rebound?

MUMBAI: Credit rating agency Moody’s and the NDA government are finally on the same page. The ratings upgrade, which came after a 13-year-wait, erases the stunning difference of opinion between Moody’s and Prime Minister Narendra Modi’s team on India’s economic scorecard.

On Friday, when the shift from Baa3 to Baa2 happened, with the outlook changing to ‘stable’ as an added bonus, the great and good from India Inc lined up to give a thumbs up, while the jagged upward lines of market indices reflected buoyed investor sentiment.

The ratings upgrade may reduce the cost of foreign capital by 40-100 bps straight. “Over a point of time, this will reduce borrowing costs of government and  financial institutions and result in increased investor confidence,” said Rajnish Kumar, chairman, SBI.

According to Chanda Kochhar, MD & CEO, ICICI Bank,  new long-term investors like pension funds will invest in Indian bonds  and existing long-term investors may increase their allocation, leading  to higher capital flows. “The move is positive for stable capital  inflows like FDI, foreign currency borrowing costs and for the rupee  over the medium-term,” said Gaurav Kapur, Chief Economist, IndusInd  Bank.  

But whether cheap capital encourages private  sector to borrow and invest is uncertain. As it is, there’s surplus  liquidity back home, interest rates are low and unless capacity utilisation picks up, fresh investment revival will have to wait. The move also appears good for currency and bond markets, but Abheek Barua, chief economist, HDFC Bank cautioned that yields of countries in the Baa2 and Baa3 investment grade are too diverse to give clarity on the upside on India’s external or effective borrowing costs through ECBs merely due to higher rating.

Above all, here’s the hammer-blow: These are the same ratings  agencies that failed to warn investors about all major crises: Enron,  Lehman Brothers, AIG, Asian financial crisis, the subprime crisis and Greece. Nor are they much cop  at analyzing corporates either. Take Satyam or to cite the latest case  –  Reliance Communications, which is drowning in debt and out of luck. Ratings agencies failed to raise red flags until crisis struck.