India’s rupee declined the most in Asia and sovereign bonds dropped after Moody’s Investors Services lowered the nation’s rating outlook to negative citing growth concerns.
The reduction comes at a time when investors have been skeptical about the government meeting its budget targets amid a slowdown in tax revenues and September’s surprise $20 billion tax giveaway for companies.
The rupee fell as much as 0.5% to the weakest in three weeks and stocks gave up their early resilience to Moody’s warning in the red in the final hour of the session, thanks to profit-booking after the benchmark index’s recent record closing spree.
A change in the rating outlook is the first step toward a downgrade, the action is no reason to exit the nation’s assets, economists and analysts said. Moody’s confirmed what is well known in the markets, and investors saw the move as a catch up, rather than a warning on the nation’s credit rating, as the agency rates India a notch higher than its peers Fitch Ratings and S&P Global Ratings.
“Most participants were aware of the issues” cited by Moody’s, Kanika Pasricha, a Mumbai-based economist at Standard Chartered, wrote in a research note. “Moody’s rates India one notch higher than Fitch and S&P, and the market probably saw this coming.”
The yield on benchmark 10-year bonds rose five basis points, the most in a month, to 6.56%. The S&P BSE Sensex index of shares fell 0.8% at the close after rising as much as 0.2% earlier.
“Investors have been aware of the decline in consumption and the economic slowdown cited by Moody’s for the past few quarters,” said Dharmesh Kant, head of research at Indianivesh Securities Ltd. “The rating processes are based on historical data, so it always comes with a lag, but the market is likely to take it in stride.”
Indian assets have got a boost in recent weeks from strong overseas inflows. That’s after better-than-expected earnings in the September quarter stoked optimism that companies have weathered the worst of an economic slowdown following a series of government stimulus measures and five back-to-back rate cuts so far this year.
Foreigners have bought stocks worth $501 million in November, after pumping in more than $2 billion in October, and have been buyers of sovereign debt for nine straight sessions.
The Sensex still capped its fourth weekly gain in five as better-than-expected company earnings attracted investors. Twenty-six of the 41 Nifty 50 firms that have posted earnings so far this season have beaten or matched the average analyst estimate.
“The index had climbed to a record high in the previous session and investors expected a small decline in stocks,” said Jitendra Panda, chief executive officer at Peerless Securities Ltd. “It is more of profit-booking rather than jitters due to the Moody’s.”
Not everyone expects the change in outlook to raise overseas borrowing costs for local companies. Indian firms may raise another $20 billion via offshore debt in the six months through March after seeking $25 billion in the six months ended September, Care Ratings said in a note Thursday.
“I don’t expect it to lead to any significant rise in borrowing costs as Moody’s is currently rating India a notch higher than Fitch Ratings and S&P Global Ratings,” which still hold the nation’s outlook at stable, said Ajeet Choudhary, executive director for fixed income at J.P. Morgan Private Bank in Asia. “I expect minor correction of 5-10bps in spreads for India IG papers.”
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