Mumbai: The Indian rupee and bond prices fell on Friday after Moody's Investors Service cut the country’s rating outlook to negative from stable, citing growth concerns.
In early deals, the rupee traded at a fresh three-week low of 71.24 a dollar, down from Thursday’s close of 70.97. The Indian unit had opened 71.27 a dollar and so far today has touched a low of 71.31 -- a level last seen on 18 October.
The yield on the 10-year Indian government bond was at 6.536% compared with its previous close of 6.492%. Bond yield and prices moves in opposite directions.
"The outlook change is a negative surprise," said Nomura Research today.
Moody's lowered India's outlook to negative from stable, while retaining the issuer rating at Baa2. The rating agency said its decision to change the outlook to negative reflects increasing risks that economic growth will remain materially lower than in the past, partly reflecting lower government and policy effectiveness at addressing long-standing economic and institutional weaknesses, leading to a gradual rise in the debt burden from already high levels.
"In the immediate term, INR bond yields might bounce on Moody’s move and overnight surge in US yields, particularly the long-end. Moody's outlook change reflects concerns over growth outlook and anticipated fiscal slippage. If fiscal consolidation is demonstrated through prudent spending and support revenues through privatisation receipts, along with a wider tax base, these worries will be allayed. Encouragingly, cyclical growth momentum should get a hand from a reduction in rates and surplus liquidity conditions," said Radhika Rao, economist at DBS Bank.
Nomura Research has lowered its GDP growth projections to 4.9% from 5.7% in 2019 and to 6.0% from 6.9% for 2020. It expects weak growth to result in a fiscal deficit slippage in FY20 and FY21. Given weak growth, Nomura expect the Reserve Bank of India to cut rates by an additional 50bp to 4.65% by mid-2020 compared with their earlier estimate of 5% as the terminal repo rate. However, it expects the government to persist with its focus on structural reforms to improve investment climate and to attract more capital inflows into India.
In the year so far, the rupee has weakened 2.08%, while foreign investors have bought nearly $10.72 billion in Indian equities and $5.49 billion in debt.
In pre-opening trade, the benchmark Sensex Index was down a marginal 0.08% or 33.62 points at 40,620.12 points. Year to date, it has gained 11.36%.
Other Asian currencies traded higher on optimism over progress in US-China trade deal. South Korean won was up 0.37%, Taiwan dollar 0.06%, Japanese yen 0.06%, Thai Baht 0.05%. However, Malaysian ringgit 0.24%, Indonesian rupiah 0.14%, China Offshore 0.1%.
The dollar index, which measures the US currency’s strength against a basket of major currencies, was at 98.114, down 0.03% from its previous close of 98.143.
(Bloomberg contributed this story)