Sensex, Nifty rise on upgrade

■ Bankers and analysts say it will help industry; Other rating firms S& P, Fitch may not upgrade India soon

Financial market participants have welcomed global ratings agency Moody’s decision to upgrade India’s rating to stable saying that the move would help Indian corporates as well as financial institutions to access capital in the overseas market at a lower cost.

This, according to the experts, would also help increase the attractiveness of Indian bond market.

“This is a huge positive for the Indian government and Indian corporates as it reduces borrowing costs for the government and will lead to lower credit risk premiums for corporates leading to cheaper cost of capital. The move also will help in improving availability and access to capital overseas for Indian companies. New long- term investors such as pension funds will now start to invest in Indian bonds and existing long- term investors could increase the allocation to Indian bonds. Thus, this measure will boost confidence, leading to higher capital flows and allocations,” said Chanda Kochhar, MD & CEO, ICICI Bank.

Soumya Kanti Ghosh, group chief economic adviser at State Bank of India ( SBI) pointed out that the rating upgrade would have a profound impact on bond yields and lift the morose sentiments in bond market, apart from impacting the movements in domestic currency.

He added that despite India’s improved fundamentals, the bond yields have moved in a contrarian direction, even higher than countries like South Africa and Russia that have incidentally witnessed deterioration in economic fundamentals.

While Moody’s decision positively surprised the market participants, some analysts feel that the other two global rating agencies such as Fitch and S& P are unlikely to upgrade India’s outlook in a hurry given its stretched fiscal situation which could further worsen due to a rise in fuel prices.

“This rating upgrade comes at a time when implementation of reforms, a subdued rural sector and weak investment growth has slowed economic growth. At the same time, a reversal in low oil prices has raised risks to the economy’s fiscal, inflation and current account dynamics. We don’t think the other two global rating agencies — Fitch and S& P — will follow- up in a hurry,” said DBS Bank.

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The equity markets soared higher on Friday after Moody’s upgraded India’s sovereign outlook to stable which is likely to attract more foreign fund flows and also help Indian corporates to raise funds from the overseas market at a lower cost.

The decision triggered fresh buying in the shares of public as well as private sector banks that led to a sharp surge in Nifty and Sensex.

The Nifty opened the day with a huge upward gap of 110 points at 10,324.55 and hit an intraday high of 10,343.60. However, the index could not maintain its positive momentum amidst profit booking and ended the day at 10,283.60, up 68.85 points or 0.67 per cent.

Meanwhile, the Bank Nifty hit an all time high of 25,924.90 in the intraday trade before ending the day at 25,728.40. The 30- share Sensex gained 235.98 points or 0.71 per cent to close the day at 33,342.80.

“At a time when the markets were facing rising concerns emanating from inflationary pressures, crude prices and fiscal numbers, this unanticipated move would bring a big relief to the overall markets and investor sentiments. Bond yields will cool off a little bit as well as the rupee should see some strength over the next few days. While it is difficult to measure the net impact on foreign exchange flows

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as well as bond yields, however, ratings upgrade by even one agency sends out a strong signal globally and can lead to upgrades by other agencies as well,” said Saurabh S Jain, MD, SSJ Finance & Securities.

According to the provisional data, FPIs bought stocks worth ` 1,276.62 crore.

Stating that the change in rating should reverse the negative sentiment in the bond markets for the time being, Arvind Chari, head of fixed income at Quantum Advisors said he does not expect a lot of foreign flows as bond limits to invest remains almost fully utilised and equities continue to remain over- valued.

“Given the evident pressures on the fiscal front and the likelihood that the government may not even meet this year’s and next year’s fiscal target, the rating upgrade seems to have come at a wrong time. Markets should worry that the government now having received the rating upgrade, may actually slacken and relax its commitment to reducing fiscal deficit, as per the stated plan,” he added.