Despite market volatility, CDS spreads haven’t risen by much
A low rise in the risk premium offers hope that things might not go that badly for Indian equity prices even if the US Federal Reserve hikes rates
One yardstick to gauge risk perception is the premium on credit default swaps (CDS), instruments used by bond buyers to insure against defaults. The bonds issued by the State Bank of India are seen as a proxy for the sovereign.
The accompanying chart shows that while the risk of default has gone up a bit, it’s nowhere close to the levels seen two years ago. At that time, India’s economic fundamentals were shakier, with a spiralling current account deficit and a volatile currency. Now, even if factors such as corporate earnings and the demand recovery don’t inspire much confidence, the economy is on a sounder footing.
Given that the CDS spreads have an inverse correlation with the Sensex, this low rise in the risk premium offers some hope that things might not go that badly for Indian equity prices even if the US Federal Reserve hikes rates.
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