India Assets Take Moody’s Cut in Stride, Focus on RBI Support

(Bloomberg) -- India's rupee, sovereign bonds and stocks climbed as investors looked past the cut in the nation's credit rating by Moody's Investors Service to the lowest investment grade.

The most-traded 6.45% 2029 bond yield was down 5 basis points to 6%, while the rupee gained 0.3% to 75.3562 per dollar. Equities posted their longest winning streak since November amid optimism that the easing of nationwide lockdown will help businesses.

The downgrade didn't come as a surprise as India's economy had started to slow even before the virus outbreak. But markets remain vulnerable to actions from S&P Global Ratings and Fitch Ratings, which might change their outlook to negative in light of the risks flagged by Moody's. Traders are now counting on the central bank to backstop the rupee and bond markets in the coming days.

“Government bonds shrugged away the downgrade along with the rupee and equities as market confidence on the RBI's support is unwavering,” said Naveen Singh, head of fixed income at ICICI Securities Primary Dealership Ltd. in Mumbai.

Moody's rating cut comes when India is making 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.

India has opened up some bonds fully to foreigners and is seeking 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 stimulus program to cushion the blow from the pandemic.

“If two of the global rating agencies maintain their ratings at current levels, albeit with a potential negative outlook, even then India will manage to get government bonds included in the global bond indices,” Kaushik Das, India economist at Deutsche Bank AG wrote in a note.

READ: India's Sovereign Rating Cut at Moody's Citing Policy Risks

Foreigners have pulled out $2.7 billion from rupee bonds last month. 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.

Bond yields edged higher in initial trading but retraced as traders bet the central bank will step in with bond purchases.

“Probable reasons for the swift move in yields can be attributed to expectations of RBI actions via open-market operations or Operation Twist,” said Saurabh Bhatia, head of fixed income at DSP Asset Managers Pvt. “In the past, regulators have been proactive to temper dislocations and high volatility in different segment of the yield curve.”