Moody’s ratings upgrade to boost FPI investment in debt market

November 17
20:25 2017

Moody’s upgrade of India’s sovereign ratings is likely to boost inflows from foreign portfolio investors (FPIs) into Indian equities, albeit marginally. The demand for Indian bonds, however, will surge even as existing FPI investors in the debt market benefit from softer yields going forward.

Foreign portfolio investors (FPIs) have pumped in more than $ 22 billion into the debt market this year compared with $ 8 billion into equities. Countries such as Taiwan, Mexico, South Korea and China have got a higher share of equity inflows from FPIs than India.

“Indian bonds have remained attractive this year owing to the high nominal yield, approaching 7 per cent sovereign yield, and the rupee appreciation of 6-7 per cent against the dollar. Both these factors amount to a significant appreciation in bond values. Add to this the Moody’s rating upgrade, the demand for India debt will only increase going further. Existing debt investors also stand to benefit from the softening of the yields,” said Tushar Pradhan, CIO, HSBC Asset Management.

“Since India does not officially borrow in the international market, the impact for government borrowing will be limited. However, corporate borrowers will benefit as interest costs ebb,” added U R Bhat, managing director at Dalton Capital Advisors (India).

Yields on 10-year government bonds softened to 7.049 per cent on Friday from 7.062 a day earlier.

In a vote of confidence in the current political leadership, Moody’s Investors Services on Friday upgraded India’s sovereign ratings from the lowest investment grade to a notch higher. Demonetisation, introduction of the goods and services tax (GST) and measures to resolve banks’ bad asset issue, among other reforms, were cited as reasons for the upgrade.

An improved rating is expected to boost investor confidence and put the country’s equity market within the investment mandate of more global fund managers. “The upgrade will put India on the map of overseas investors who do not invest below a certain threshold rating,” said Vikas Khemani, president and CEO, Edelweiss Securities.

While the benchmark 30-share Sensex rallied more than 400 points intraday on Friday it gave up some of the gains to end at 33,342, up 236 points, or 0.71 per cent, justifying assertions of some market watchers that gains for the equity market from the upgrade may be limited.

“Markets have been factoring in the improvement in India’s macro stability for some time now, and the credit spread and yields reflected that. The upgrade will boost sentiments but we don’t expect any major material change in FPI inflows or the cost of capital for corporates,” said Gautam Chhaochharia, head of India research at UBS.

According to experts, the impact on overseas inflows into equities will be marginal as these investors typically have the propensity to take on a much higher risk than that suggested by ratings. What’s more, investors into equities do not look at ratings per se but factors such as improvement in corporate earnings and valuations.

“Moody’s upgrade should improve foreign investors’ sentiment toward India. However, over the medium term, foreign flows, especially into equities, are likely to depend on corporate earnings performance. But the upgrade should offer a boost to investors’ sentiment,” said Manishi Raychaudhuri, Asia Pacific Equity Strategist, BNP Paribas.

Nonetheless, India’s move to the second lowest level of investment grade comes even as most emerging markets languish at junk or the lowest level of investment grade, according to experts. India is also among the few emerging markets that do not face a serious fiscal, monetary, forex or political issue. Also, with corporate earnings being a function of interest cost, FPIs may start finding Indian equities attractive again if rates remain low.

Related Articles