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Moody's Upgrade

Moody's recent upgrade has reportedly brought cheer to India. Should it have?

That Moody's Investor Service has grown closer to India, of late, is no secret. It has upped its stake in the local ratings agency, ICRA, to nearly a third. And it has also started occupying more media space than it once did.

Now, like them or not, global investors tend to go by Moody's ratings of Indian sovereign debt. Back in 1998, when it downgraded Indian sovereign debt in response to the nuke-testing at Pokhran, the fear that Indian business prospects would be harmed was a legitimate fear. And now that Moody's has upgraded India's sovereign foreign currency debt from Ba1, 'speculative grade', to Baa3, 'investment grade', it wasn't for nothing that domestic businesses heaved a sigh of relief.

The government's debt rating is typically taken as a proxy for any debt issued by an entity within the country's borders, and the upgrade makes it easier for Indian companies to issue international bonds. The upgrade, thus, is what it sounds like: good news.

But to think of the upgrade as a major mood-uplifter, or some sort of new economic propellent, alas, would be a folly. The data on which the decision was made was hardly 'news' to anyone who reads newspapers in India. Yes, India now has $100 billion in foreign exchange reserves---more than twice the projected year's obligations. And no, India will not default on its dollar bonds, a statement that can be made within a comfortable probability band of confidence, no matter how close 'India' and 'Russia' might appear on some global risk-mapping chart.

Indian analysts have always seen Indian debt as being "blatantly under-rated", to quote a Singapore-based country watcher, by the global rating agencies. So what the upgrade does, in their view, is make up.

The domestic story, though, is not the same thing. Moody's has maintained its speculative Ba2 rating on local Indian sovereign debt, citing the government's fiscal deficit as its main point of worry. Not too many analysts deny that this indeed is a problem that needs to be addressed.

But then, some would say, a bad fisc has been the case for some two decades now, and that's a long time. Long enough for a computer revolution to shake the economy up. In cyber-time, it's probably aeons---long enough for the personal computer pioneer Apple to turn into an online music marketer.

Yet, the stakes are much higher now than they were in those halcyon days (hey-relatively), and that's the simple reason that the fiscal deficit makes such deep furrows of anxiety on the foreheads of the few who understand big picture economics. Understanding the finer aspects of risk is by no means easy, especially under circumstances that make linear extrapolations so unreliable. No crack-up so far is no reason to expect no crack-up ahead: (ask probability wonks).

Still, it's the external front that concerns India's overseas watchers, especially in the West, more. And on this front, the picture looks undeniably better. India's $100 billion has reassured rating agencies other than Moody's as well. Fitch has also upgraded India's dollar bonds---from BB to BB+. And Standard & Poor's has gone from BB negative to BB stable.

Fair or foul, call it what you will, that's the long and short of the credit rating story. It doesn't add much to what's known. So, net net, the cheer isn't likely to last too long. As the days go on, the ratings are likely to fade away from media prominence, even as other signs of the country's investment-worthiness take center-stage. As the discerning analyst has grown accustomed to, there'll be the honest trifles, and there'll be matters of deep consequence. It's up to you what to focus on.

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