Doing Business rankings, Pew study ascertaining PM´s popularity, Moody’s upgrade are all reflections of Modi Govt’s hard-work and reform process," Amit Shah, the president of the ruling Bharatiya Janata Party, said in a Twitter post.
But some economists said an upgrade from the other big rating agencies seemed unlikely. Radhika Rao, an economist at DBS, said implementation of reforms, a subdued rural sector and weak investment have slowed economic growth while rising oil prices have raised the risks.
"We don’t think the other two global rating agencies Fitch and S&P - will follow-up in a hurry, based on their cautious rhetoric," she said, noting their concerns on "weak" state and central government finances.
At 0550 GMT, the benchmark 10-year bond yield was down 9 basis points at 6.97 percent, the rupee was trading stronger at 64.84 per dollar versus the previous close of 65.3250, while the NSE share index was 1.1 percent higher.
"We have been expecting it for a long time and this was long overdue and is very positive for the market," said Sunil Sharma, chief investment officer with Sanctum Wealth Management.
"Looks like sentiments are going to become positive." However, debt traders said the rally was unlikely to last beyond a few days, as the coming heavy bond supply and hawkish inflation outlook were unlikely to change soon. "Who has the guts to continue buying in this market?" said a bond trader at a private bank. Moody´s said the recently-introduced goods and services tax (GST), a landmark reform that turned India´s 29 states into a single customs union for the first time, will boost productivity by removing barriers to inter-state trade.
"In the meantime, 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," the ratings agency said in a statement. Still, some market participants questioned the timing of the move.
"The timing is little dicey for the upgrade given that there are lot of concerns over the government´s fiscal discipline," said a foreign bank dealer, adding he did not expect other agencies to follow Moody´s.
Moody´s said it expects India´s real GDP growth to moderate to 6.7 percent in the fiscal year ending in March 2018 from 7.1 percent a year earlier. The agency also raised India´s local currency senior unsecured debt rating to Baa2 from Baa3 and its short-term local currency rating to P-2 from P-3.Modi´s government eased tax requirements last month for small- and medium-sized companies in response to growing criticism of its economic stewardship.
Moody´s noted that while a number of key reforms remain at the design phase, it believes those already implemented will advance the government´s objective of improving the business climate, enhancing productivity and stimulating investment. "Longer term, India´s growth potential is significantly higher than most other Baa-rated sovereigns," said Moody´s.
The agency said challenges from the implementation of the GST, continuing weakness in private sector investment, slow progress resolving banking sector asset quality issues, and lack of progress in land and labour reform remained key issues.