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India Local Rating Raised by Moody’s to Match Foreign Grade

Dec. 21 (Bloomberg) -- Moody’s Investors Service raised India’s local-currency debt rating by one level to the lowest investment grade, scoring it the same as foreign-currency bonds and keeping a stable outlook for Asia’s third-biggest economy.

Moody’s doesn’t see “justification for a rating bias in favor of either local currency or foreign currency government debt,” the ratings company said in an e-mailed statement today. The Baa3 rating “incorporates credit strengths such as a large, diversified economy, robust medium-term growth prospects and a strong domestic savings pool that facilitates the financing and refinancing of the government’s relatively high debt burden.”

Moody’s had rated India’s rupee sovereign debt at Ba1, the highest junk grade, before today, while the foreign-currency debt is rated at Baa3, a level shared by Namibia, Tunisia and Iceland. India’s weak “fiscal metrics” remain a constraint for the nation’s rating as government debt levels are higher than similarly rated nations, the company said.

“The stable outlook on India’s rating reflects Moody’s medium-term assessment of the country’s growth, fiscal, and balance of payments outlook, relative to other countries,” it said. “Moody’s expects India’s growth downturn to persist over the next two quarters, but notes that growth rates will remain above the average for similarly rated peers.”

Economic expansion is already waning after the central bank raised interest rates by a record to tame the fastest inflation among the so-called BRIC nations that include Brazil, Russia and China. India’s gross domestic product grew 6.9 percent in the three months ended Sept. 30, the weakest expansion since the second quarter of 2009.

Growth Outlook

Moody’s said it expects growth to slow to below 7 percent in the fiscal year through March 2012 and anticipates the budget deficit to widen to about 7.6 percent of GDP in the period.

The yield on the benchmark 10-year government bond has risen 40 basis points this year, to 8.32 percent, as inflation remained above 9 percent, while increased supply of bonds damped demand. The Reserve Bank of India has increased borrowing costs 13 times starting March 2010 to contain price gains, and expects inflation will cool to 7 percent by the end of March.

India’s benchmark wholesale-price inflation was 9.11 percent in November.

The upgrade “ will act as a wake-up call for foreign institutional investors,” Thomas Mathew, a joint secretary in the Ministry of Finance, told reporters in New Delhi today. “This will have an amazing impact on sentiments.”

The BSE India Sensitive Index, which has lost more than a fifth of its value in 2011, rebounded 3.4 percent in Mumbai today, while the yield on the 8.79 percent bonds due November 2021 rose five basis points, or 0.05 percentage point.

Missing Targets

“The fiscal deficit is vulnerable to cyclical downturns, and the government is expected to miss budgetary targets this year,” Moody’s said. “Still, due to high nominal growth, the government’s debt-to-GDP ratios have been declining over the last five years, including during the global financial crisis.”

India’s finance ministry in November pitched for a higher rating in a meeting with Moody’s officials, R. Gopalan, secretary in the department of economic affairs, said Nov. 15. Finance Minister Pranab Mukherjee said Oct. 4 that it may be hard to meet his goal of cutting the budget deficit to a four-year low of 4.6 percent of GDP.

“Improvement in government finances, coupled with enhancements to the investment climate and a reduction in infrastructure bottlenecks, could lead to the rating being considered for an upgrade from current levels,” Atsi Sheth and Andrew Schneider, sovereign analysts at Moody’s, said in a separate report today.

Still, a sustained rise in debt or “continued worsening of the balance of payments well beyond the period of current global uncertainty could trigger a downgrade.”

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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