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India’s rating upgrade: too little, too late

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India rejoiced late last week when Moody’s upgraded the sovereign's rating for the first time in 14 years. The boost has certainly stirred up some positive sentiment around the country and is a great stamp of approval for the numerous reforms it has put in place over the past year. But in reality, it will be business as usual, and the ratings lift will only have a limited impact — unless India thinks big.

Moody’s uplift of the Indian government’s rating to Baa2 from Baa3 last Friday prompted a quick response from the market. Yield premiums on dollar bonds from the country dropped close to a decade low, while both the rupee and stock markets rallied.

The upgrade is set to lower the costs of borrowings for the country’s issuers, and market watchers say the hope is for an uptick in offshore bond supply, which is already coming through. Conglomerate Reliance Industries was the first Indian issuer out of the gate this week and it priced a $800m bond at the tightest levels for a 10 year dollar note from an Indian corporation.

But it is open to question just how much of its success can be attributed to the sovereign upgrade.

Bankers on the deal admitted that the ratings upgrade, while carrying positive sentiment, had little if any impact on Reliance’s bond, as the company has long been rated at the same level as the government’s new rating. India’s upgrade was just the icing on the issuer’s already delicious cake.

Likewise, the pipeline of Indian issuers expected to hit the market before the end of 2017 was already strong. The new mandates announced on Tuesday had little to do with the sovereign boost, bankers said.

Simply put, the excitement in the market is overrated. And the impact of the ratings on offshore bond issuance will be limited at best.

That shouldn’t come as much of a surprise. China and Indonesia both faced their own ratings shifts this year, neither of which managed to change much for investors.

In Indonesia’s case, S&P gave the country a much anticipated upgrade to BBB- from BB+ in May, finally pushing the southeast Asian country to full investment grade status across all three international ratings agencies. Having the fresh investment grade status opened up the country to some investors whose mandates are explicitly limited to investment grade rated credits, but otherwise there was little meaningful movement in Indonesia debt. The sovereign is a well-known and savvy issuer — one that investors have generally considered to be investment grade, despite its lack of a corresponding rating.

As an opposite example, China’s downgrade from both S&P and Moody’s this year certainly did not affect the country or its issuers. In May, when Moody’s moved the country to A1 from Aa3, and in September, when S&P shifted its rating to A+ from AA-, there was little to no price move.

Investors barely flinched, and issuers kept on issuing at tight prices. So much so that, as an added message of disregard to ratings, China sold its first dollar bond in a decade at the end of October without any ratings attached. Investors rushed to buy the $2bn dual-tranche bond at ultra-low prices anyway, with the deal resetting the curve not only for Chinese issuers, but for the rest of Asia too.

International ratings agencies face a fair amount of criticism at times for their ratings moves, and are often blamed for being retroactive in their decision making. It can, understandably, be difficult for agencies to make quick decisions about a sovereign rating, given the constantly changing market environment. But what the cases of India, Indonesia and China have taught us is that the market knows this — and is able to react in its own appropriate ways.

If India truly wants to make a statement, it needs to think differently. One way could be perhaps by issuing its first international dollar bond — which would serve as a litmus test for the sovereign’s standing among offshore debt investors. Such an issuance will naturally grab headlines, and if the government pulls off a landmark deal, more benefits will only follow.

An upgrade undoubtedly is the international recognition that prime minister Narendra Modi has been looking for, given some of the sweeping reforms he has put in place. But the onus is now on India to go big or go home.

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