Reopening Economy Drives India Bond Rebound Despite Moody’s Cut

(Bloomberg) -- Private-sector Indian companies have fared well in the bond market this week despite a sovereign rating downgrade by Moody's Investors Service, as investors focus more on early signs of some improvement in the economy.

Spreads on the firms' U.S. currency notes dropped 5.7 basis points compared with last week, according to DBS Bank Ltd. data, even after Moody's cut India's rating to the lowest investment grade with a negative outlook on Monday.

There have been some signs of nascent economic recovery as India begins to ease the world's most stringent restrictions. After 122 million people lost their jobs as a result of a nationwide lockdown, the total number of people employed increased by 21 million in May even before the gradual lifting of the restrictions, according to Center for Monitoring Indian Economy Pvt. data released this week. Services sector activity in the nation also picked up slightly last month, data showed Wednesday.

“For now, markets could look past India's rating downgrade,” Chang Wei Liang, a macro strategist at DBS Bank, said in a note.

The muted reaction to Moody's sovereign downgrade on dollar-denominated papers comes amid a global rally in risk assets with the premiums on investment-grade bonds declining across Asia.

Still, despite the early signs of improvement, the challenges India faces remain stark, after its lockdown resulted in record low economic activity and fueled the biggest earnings decline in at least six years.

And state-owned Indian firms' dollar debt didn't hold up quite as well after Moody's also took negative actions including one-level rating cuts and changes in outlook against a swathe of government-backed firms. Spreads on their securities widened slightly after the cut, according to DBS Bank.