MOODY’S RATING UPGRADE. Moody's rating: Bond market euphoria could be shortlived

Friday’s price movement in the bond and stock markets suggests that the euphoria over sovereign rating upgrade by Moody’s could be short-lived. In fact, price movement in the benchmark bonds and currency market is suggesting Moody’s announcement may not have any impact at all.

US-based ratings agency Moody’s upgraded India’s debt ratings to stable from positive. In September, Bloomberg economist Michael McDonough had reported that credit default swap (CDS) ratio had implied a sovereign ratings upgrade for India and the bond market had already factored it in.

The 10-year bond yield, a key gauge of market liquidity, closed nearly 14-month high at 7.047 per cent after an initial dip to 6.935 per cent in the early morning trade. It had closed at 7.062 on Thursday. The yields rose by nearly 10 per cent since June indicating out of foreign money from debt market.

Foreign portfolio investors have been net buyers to the tune of $22.3 billion in India’s bond market so far this year. But they sold debt worth nearly $476.16 million over the last nine trading sessions. A rising bond yield curtails inflow of foreign capital and puts pressure on the rupee. Rising oil prices, government’s PSU re-capitalisation and likely shortfall in GST collections are among key factors that have shaken the domestic bond markets while stocks are still in euphoria. Finer details of the bank re-cap plan are not known but bond markets are expecting more supply in the coming years as banks will sell re-cap bonds in the open market.

The rupee, which had opened at 64.75 and rose to 64.63 on the news could not sustain its gains and closed the day at 65.02. Yet, it was 0.47 per cent higher from its previous close of 65.32.

‘No change’ “There have been rumours of India’s sovereign ratings upgrade in the bond market and we are pretty much in a spot where such ratings may not change anything on the ground,” said a head of bond trading at one of India’s oldest broking house. “Moody’s upgrade is more sentimental for India’s global standing but may not have any real economic impact on the country. Instead, a near 10 per cent spike in benchmark bonds is factoring in much more economic risks with regard to fiscal slippage, Fed rate hike and huge supply of paper from both Central and State government.”

The Sensex and Nifty index, key equity benchmarks too gave up nearly half of their gains but a sustained buying from domestic institutions and insurance companies in tandem with news flow from the government is keeping them away from any meaningful correction, analysts said. The Sensex gave up around 200 points from its day’s high of 33,520 to close 0.71 per cent higher at 33,342. The Nifty index closed 0.67 per cent higher at 10,283 after touching a intra-day high of 10,343. The Bank Nifty which rose by around 2 per cent on Moody’s news to touch a intra-day high of 25,924, closed the day at 25,728.

Also read: Economists’ take: Well-timed and positive for the bond market

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