Higher FII cap in G-secs, bank infra bonds credit +ve: Moody's

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Global ratings agency Moody's today said the recent RBI measures on raising foreign investment limit in government bonds and easy norms for infrastructure bond issuances by banks will help the growth process and thus are credit positive for the country.

"Raising the limit for FIIs is credit positive for the country because it will increase foreign investment in government securities over the next several months, which, in turn, will accelerate the incipient growth by helping stabilise domestic interest and currency rates," said the agency, which has a Baa3 sovereign rating with a stable outlook on the country. Other rating agencies have a BBB minus ratings with a negative outlook for the country.

The agency added that the hike in limit to USD 25 billion from the earlier USD 20 billion is not large enough to overshoot the foreign ownership in government debt to over the 10 per cent mark.

Hence, "the sovereign's exposure to fluctuations in international risk appetite remains limited," the agency warned.

At least two overseas rating agencies (excluding Moody's) had threatened to downgrade the country's sovereign ratings to junk or below investment grade after the growth story got derailed to under 5 per cent for two consecutive fiscals and there were other concerns like a sense of policy paralysis causing project delays and a ballooning fiscal and current account deficits.

Moody's said the Reserve Bank guidelines allowing banks to raise long-term bonds to lend for the longer gestation infrastructure projects with exemptions on the mandatory CRR and SLR will support investment and growth.

It also highlighted risks which infrastructure sector carries and pointed out that lending to certain sectors within the overall gambit between 2004-10 has contributed to stress in the bank assets.

On RBI's future trajectory, it said global commodity price uncertainty and the likely pressure on food inflation front owing to weak monsoons will "preclude the RBI from implementing significant monetary stimulus this year."

RBI efforts will be directed towards exercising its supervisory and regulatory authority to nudge a sustainable acceleration in growth, it said.

Growth has come at the sub-5 per cent level for two consecutive fiscals and pressure from there is a constituency which wants RBI Governor Raghuram Rajan, who has been having a strong anti-inflationary stance, to change track and address the growth concerns.

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  • The govt needs to spend its cash without being frugal or wasteful

    Increased government spending can provide a temporary stimulus to demand and output. This is Economics 101.


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