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MUMBAI : India is likely to outperform other emerging markets, benefiting from global investors viewing the country favourably because of an upgrade in its sovereign rating outlook, analysts said.

While a sharp rebound in economic activity has supported investment sentiment after the pandemic’s devastating second wave, a gradual fiscal consolidation will boost sentiment further, they said.

“Now that the growth recovery has been better than anticipated, Moody’s has changed the rating outlook. Markets price rating actions much ahead of actual changes so the current bullishness and investment sentiment has already priced in this change," said Arvind Chari, chief investment officer at Quantum Advisors. Chari expects long-term foreign investors to remain allocated in India and, over time, increase their investment.

Moody’s Investors Service on Wednesday raised the rating outlook for 18 Indian companies and banks, including Reliance Industries Ltd, Infosys Ltd, State Bank of India and Axis Bank, to ‘stable’ from ‘negative’, in line with the change made to the sovereign credit rating outlook.

On Tuesday, Moody’s revised India’s sovereign credit rating outlook to stable on receding risks posed by the financial sector to the economy. The country’s credit rating was, however, retained at Baa3, the lowest investment grade.

On Wednesday, Indian equities opened positive but gave in to profit booking in the second half. Analysts believe that external global factors could still spoil the party for Indian investors. “For India, although during reasonable inflation our markets do well, if oil prices rise further, it can dent India’s macro recovery," Chari said.

According to Suvodeep Rakshit, senior economist, Kotak Institutional Equities, Moody’s outlook revision reinforces the fact that the risks for the financial sector are lower now, along with visibility of sustained growth and gradual fiscal consolidation. “The fiscal situation is also better than what it seemed at the start of covid. While there are some structural issues on growth, some of the reforms and measures taken since the pandemic and measures before it will be positive for growth in the medium-to-long term," he said.

Moody’s has projected the Indian economy to grow at 9.3% in FY22 over a 7.3% contraction in FY21. It, however, cautioned that weaker-than-expected economic conditions or a resurgence of financial sector risks would put downward pressure on India’s sovereign rating.

Neeraj Chadawar, head of quantitative equity research, Axis Securities, said the upgrade in the outlook for the country is sentimentally positive for the market and will drive investment demand, which will reflect in terms of flows in the coming months. “This rating outlook upgrade will drive more confidence towards the long-term flows in the Indian equity market as the economic conditions are emerging positive due to the pace of the vaccination drive. The earnings momentum continues to be a crucial factor for the market performance moving forward, Chadawar said.

While incrementally positive, Moody’s action alone is unlikely to significantly impact India’s stock markets, said Nitin Bhasin, co-head of institutional equities and head of research, Ambit Capital. “At this point, there are risks to India’s economic recovery pace. Firstly, rising global commodity prices will fan inflation in India and could prompt action from RBI. Secondly, there are still no visible signs of significant capex growth as capacity utilization is still well below 75%, which puts in doubt the sustainability of growth once the festive season-led pent-up demand wanes. Hence, earnings could face some downward pressures," he said.

Despite the positive stance by the rating agency, Indian markets succumbed to selling pressure on Wednesday, with the benchmark indices slipping 1%. The rise in crude prices kept investors under pressure. The BSE Sensex fell 555.15 points or 0.93% to 59,189.73. The National Stock Exchange’s Nifty index shed 0.99% to 17,646. According to Reuters, oil prices hit a multi-year high on Wednesday above $83 a barrel, supported by the Opec+’s refusal to ramp up output more rapidly against a backdrop of concern about tight energy supply globally. Later in the session, however, crude eased from its highs.

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