India’s rupee and stocks saw little reaction in offshore trading after Moody’s Investors Service lowered the country’s sovereign rating by a notch to the lowest investment grade, a move largely expected by markets.
The one-month dollar/rupee non-deliverable forward contract was little changed, as were stock futures on the NSE Nifty 50 Index in Singapore. The underlying equities gauge capped its fourth day of gains Monday -- the longest winning run in a month -- after the government outlined steps to ease the world’s strictest stay-at-home orders.
“The downgrade is on expected lines and is unlikely to impact the market in a meaningful way," said Chakri Lokapriya, managing director at TCG Asset Management in Mumbai. Still, global funds are likely to remain underweight on Indian assets until “there’s a meaningful economic recovery," which will begin from April 2021, he said.
Moody’s rating cut may undermine India’s efforts to attract foreign capital into its debt market to fund a ballooning fiscal gap. While economic growth slowed to 3.1% in the first three months 2020, the budget deficit for the year ended March touched 4.59% of gross domestic product, the widest in six years, as the slowdown left the government with a revenue shortfall.
Nomura Holdings Inc. flagged the possibility of a downgrade by Moody’s and a outlook change by Fitch Ratings Ltd. in an April report. It said near-term implications from such a move by Moody’s wouldn’t surprise investors as they have factored in the deterioration in public finances even before the coronavirus epidemic hit the economy.
A change in the outlook by other agencies poses a bigger risk to the rupee as their ratings were lower than Moody’s before today’s downgrade, according to Nomura. The cut by Moody’s brings India’s rating on par with S&P Global Ratings and Fitch, both of which have a BBB- rating.
“The move may not have a major impact on the rupee as Moody’s had a higher rating on India," said Jayesh Mehta, country treasurer at Bank of America. “The RBI will be there to support the currency in case of any drop."
India has opened up some bonds fully to foreigners and is seeking an entry into global bond indexes, which can potentially draw billions of dollars. Prime Minister Narendra Modi has raised his borrowing target to 12 trillion rupees ($159 billion) to meet lost revenues as well as fund a fiscal stimulus program to cushion the blow from the coronavirus pandemic.
With global funds remaining net sellers of local debt, traders are looking at the Reserve Bank of India to bail out the huge borrowing program. The RBI cut its policy rate by 40 basis points in an out-of-turn meeting last month.