New Delhi: Moody’s Investors Service on Wednesday reaffirmed the lowest investment grade rating—Baa3—for India with a positive outlook, holding that the reform efforts of the government were yet to accelerate private investment.

The rating update comes days after S&P Global Ratings kept its sovereign credit rating for India unchanged at the lowest investment grade—BBB- with a stable outlook—and ruled out an upgrade till 2017-end.

In September, the finance ministry objected to a statement by Moody’s to the effect that it was unlikely to upgrade India’s rating anytime soon. After the S&P rating report was released on 2 November, economic affairs secretary Shaktikanta Das called for “introspection" by the rating agency.

India has long held that such ratings are inherently biased against emerging economies and has put in efforts to form a Brics-level sovereign rating agency without success. Brics is a grouping comprising Brazil, Russia, India, China and South Africa.

Moody’s said it continues to believe that economic and institutional reforms introduced by the government will ensure India’s growth outperforms its peers over the medium term and that further improvements in its macroeconomic and institutional profile will be achieved. “However, the reform effort to date has not yet achieved the conditions that would support an upgrade to Baa2, in particular in accelerating private investment to support high, stable growth, without which the government’s debt burden—a key constraint on the rating—is likely to remain high for a sustained period," it added.

Moody’s upgraded India’s rating outlook to positive from stable in April 2015 to reflect continuous focus on reforms by the Narendra Modi government.

The rating agency said it would consider an upgrade upon seeing evidence that institutional strengthening will elicit sustained macroeconomic stability, higher levels of investment, more favourable fiscal dynamics as well as additional policy measures. “These policies could include land or labour reforms by a significant number of states, the establishment of a credible and effective fiscal framework, complemented by measures to reduce expenditure or increase revenues; tangible progress in the implementation of the bankruptcy law and a workable strategy to resolve banks’ bad assets over the medium term," it said.

Moody’s lauded the government’s broad range of policy measures that are conducive to moderating inflation and limiting current account deficit. “In particular, the passage and ongoing implementation of a range of economic reform measures, including the goods and services tax and reform of the bankruptcy code point to improvements in government effectiveness. This assessment is also supported by higher rankings in the World Economic Forum Global Competitiveness Index and World Bank Worldwide Governance Indicators," it added.

However, the rating agency pointed out structural constraints to a rating upgrade such as lower per capita income of around $6,000 on a purchasing power parity basis, over-dependence on monsoon, and high debt burden of government.

Moody’s also pointed out that bad asset quality continues to pose sovereign credit risks. “While recognition of non-performing loans has largely been achieved, lack of resolution of impaired loans will continue to constrain India’s sovereign credit profile until a viable resolution mechanism is put into place," it said.

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