Moody’s upgrades India’s Sovereign Bond Rating to Baa2

Indian Economic Update


Inflation rises in October; IIP moderates in September

Headline IIP decelerated in September to 3.8% YoY from a 9-month high of 4.5% YoY (revised) in August dragged down by consumer durables. Industrial production in H1 FY2018 halved to 2.5% YoY from 5.8% YoY in H1 FY2017.

  • On a sectoral basis, electricity weakened sharply in September clocking a growth of 3.4% YoY from a 3-month high of 8.3% YoY in August. Mining also slowed from a 5-month high of 9.2% to 7.9% in September. Manufacturing remained steady at 3.4% YoY in line with the previous month.
  • On the use based classification, consumer non-durables and capital goods continued to show a remarkable improvement growing at 10% YoY (prior: 7.3% YoY) and 7.4% YoY (prior: 5.2% YoY) respectively in September indicating better rural demand and some traction in investment activity. Intermediate goods re-entered positive territory after 4 months, clocking a growth rate of 1.9% YoY. In contrast, consumer durables was a key laggard which failed to sustain the correction in August (+3.4% YoY) despite the impending festive season, registering a contraction of 4.8% in September. In a sobering development, infrastructure & construction goods slowed for the second consecutive month.
  • Positive contribution to headline IIP growth came from Digestive Enzymes and Antacids (DEA) which is a volatile category, while electric heaters and gold jewellery were the major negative contributors to the headline IIP print.

While the loss in momentum for industrial production in September could be partly attributed to the loss of working days due to the festive season, disaggregated data paints a more positive picture (capital goods). The recent pruning of the number of items in the highest GST bracket will be a demand positive, which, in conjunction with smoothening of teething GST related issues will boost production.


CPI inflation rose in October, while core inflation eased mildly. We expect the CPI trend to evolve favourably going ahead.

Key takeaways are as follows:

  • Sharp uptick was seen in housing inflation and the October print witnessed a higher than expected momentum of 1.2% MoM. This seems to indicate that there is also some state HRA pass through to the print over and above the Central HRA.
  • However, the sequential momentum in miscellaneous component is very encouraging as this will help in keeping the overall core momentum under check. Within miscellaneous, momentum has reduced sharply in household goods and services, personal care, transport and recreation.
  • The government has recently reduced the GST tax incidence on a wide range of goods and services and we believe that the positive impact of this will be seen over the next few months in the core inflation print. We believe the direct cumulative sensitivity could be to the tune of ~40 bps.
  • There has been some uptick in education and health, but we believe most of the GST pass through should be done by now and incremental increase in these two segments will be lower.
  • There has been some sequential uptick in food prices, but we expect this to reduce significantly over the next few months in keeping with the seasonal trends.

As far as monetary policy is concerned, the MPC has remained fairly hawkish in their rhetoric and scope for further accommodation is limited at the moment. Lower sequential momentum for food and core will help in keeping headline CPI within RBI’s comfort zone till the end of this fiscal, but the MPC’s focus will shift towards next year’s CPI trajectory which is likely to be higher than the current average.


Moody’s raises India’s sovereign bond rating

Moody’s Investors Service raised India’s sovereign bond rating for the first time since 2004, citing continued progress in economic and institutional reforms. The rating agency upgraded India's rating to Baa2 from Baa3. The outlook on the rating is 'stable'.

The reforms cited by Moody’s include:

  • Goods and Services Tax (will promote productivity by removing barriers to interstate trade),
  • A new monetary policy framework,
  • Measures to check the banking sector’s bad loans ratios,
  • Demonetisation,
  • Efforts to bring more areas into the formal economy,
  • The Aadhaar biometric system, and
  • The Direct Benefit Transfer system.

These reforms will reduce informality in the country, Moody’s report said.
The ratings firm said reforms being pushed through by Prime Minister, Narendra Modi’s government will help stabilise rising levels of debt. "While India’s high debt burden remains a constraint on the country’s credit profile, Moody’s believes that the reforms put in place have reduced the risk of a sharp increase in debt, even in potential downside scenarios," according to the firm’s release.
It noted most of the measures will take time for their impact to be felt, while some -- such as GST and demonetisation -- have undermined growth in the near term. Moody’s forecast GDP growth of 6.7% for FY2018, with a pick up to 7.5% in the following year, as disruption fades, and "similarly robust" levels from 2019 onward.


Other important developments during the week:

  • India’s exports declined by ~1.1% YoY in October, while imports rose by ~7.6% YoY. The trade deficit widened to USD 14.0 bn in October from USD 9 bn in September.
  • The GST Council announced significant changes on the tax rates levied on various goods. Specifically, the council decided to move 178 items from 28% slab to 18% slab, leaving mainly sin goods and white goods in the 28% basket. The GST Council also approved a 5% rate on all restaurants.


Global Update

Important developments during the week:

  • Bank of Japan Governor, Mr. Haruhiko Kuroda said that BOJ communications are a matter of explaining the content and intent of monetary policy in a straightforward manner. He also said that inflation expectations are picking up slightly after previously being hurt by sharp decline in oil prices.
  • US House of Representatives passed the tax reform bill. The attention now shifts to US Senate, where the reform is likely to face a major hurdle with some republicans already expressing their dissent.


Indian equities started this week lower snapping a two-day long winning run due to profit booking by some investors and mixed cues from global equity markets. The subdued industrial production activity also weighed on investor sentiment. Equities benchmarks closed at a three-week low after accelerating inflation tempered expectations of a rate cut by the RBI next month and concerns over trade deficit that widened to an almost 3-year high. Also, disappointing earnings by some blue-chip companies weighed on the market.


Meanwhile, following cues from Asian equity peers, Indian equities snapped the three-day decline, sharp revision in GST rates buoyed the business sentiment. Indian equities got a huge push as investors resorted to “bargain-hunting” with select stocks such as PSU banks etc. Equity indices cheered the rating upgrade by Moody’s on last trading day of the week.


During the week Sensex gained 0.08% to close at 33342.8 while Nifty declined 0.37% to close at 10283.60. 


Indian government bonds opened the week lower. The reduction in GST rates on a majority of items led to fears of excess burden on the fiscal this year.


Gilts ended lower with the 10Y yield touching the 7% mark for the first time in the last 14 months on Tuesday as RBI seems unlikely to cut rates in the upcoming policy meet after CPI and WPI inflation came in higher than market expectations. Adding to the bearish sentiment was the Reserve Bank of India's recent open market bond sale announcement.


Drop in global crude oil prices and rating upgrade by Moody’s lifted the sentiments towards the end of the week.


The 10Y benchmark yield ended at 7.04% as compared to the previous week’s close of 6.96%.



Oil edged lower during beginning of the week. OPEC Secretary – General Barkindo said that the production cuts were the “only viable option” to restore stability to the oil market and further added that OPEC in its monthly market report will raise its estimate of oil demand growth to above 1.5 million bpd for both 2017 and 2018. Saudi Arabia signaled it would raise security at its crude facilities after blaming Iran for a fire on a pipeline that connects the two Arab allies.

Crude prices were pushed lower after a bearish IEA report released revised their oil demand growth forecast downwards by 0.1 million bpd for both 2017 and 2018. The report painted a rosy picture for US crude output which it said would grow at the strongest pace ever seen by any country until 2025. Simultaneously fighting to drain the oil glut, Saudi Arabia’s export to America fell to its lowest in 30 years last month at 525,000 bpd.
Moreover, an unexpected build of 6.5 million barrels of US crude stocks reported by API further pulled prices down.

Meanwhile, Crude prices fell sharply as reports of Russia not being exactly on the same page as Saudi Arabia on extending output cuts, hit the market. According to EIA, US crude inventories expanded for a second week while output climbed for the fourth time to 9.65 million bpd, the highest in more than three decades.




Gold started week higher, expectations of a rate hike returned to weigh on the metal after the Philadelphia Fed President said that he expected to back an interest rate hike next month. The yellow metal reversed its gain despite a weaker dollar and falling Treasury yields. According to the CFTC data, hedge funds and money managers raised their net long position in COMEX gold by 7,027 contracts to 173,562 contracts in the week to November 7.

The metal gained positive traction much in sync with the dollar index. Meanwhile, a sell-off in global equity markets also supported the precious metal's safe-haven demand. The better than expected duo data of US CPI and retail sales weighed on the metal, but uncertainty around the US tax reform supported the metal.




Indian Rupee started the week weaker, the weak performance of both equity and gilt markets also weighed on the domestic currency. Oil importers’ dollar demand and foreign banks’ dollar purchases provided major headwinds for the domestic currency. Fears of foreign fund outflows were offset by weak USD against major currencies.

Meanwhile, strengthening of the dollar index, after favourable inflation outturn strengthening Fed’s case for future rate hikes has weighed on emerging market currencies. However, sovereign bond rating upgrade by Moody’s supported the INR towards end of the week.


Source: ICICI Bank Research, Bloomberg and CRISIL.