Experts say Moody#39;s upgrade to aid spurt in shares, rupee to gain

November 20
17:22 2017

Moody’s Investors Service on November 17 upgraded India’s sovereign rating after a gap of 13 years and the rupee, bonds and stocks all rallied on the good news.

Reacting to the development, the S&P BSE Sensex rallied over 400 points while the Nifty50 is back above 10,300. The rally was led by banks, metals, realty, energy, consumer durables, and oil & gas stocks.

Moody’s raised India’s rating by one notch to Baa2 from Baa3. It also revised its outlook on India to ‘stable’ from ‘positive’, citing the series of reforms that the BJP government has undertaken. The rating agency last revised its rating on India in January 2004, when India was upgraded to Baa3 from Ba1.

A poll of 10 fund managers and research heads by Moneycontrol revealed that Moody’s ratings upgrade is likely to give a boost to the stock market. Fund managers expect the market to gain by 3-4 percent on the back of the development.

Almost all industry experts who participated in the poll believed that the rupee may gain by nearly one percent against the dollar amid overseas fund flows over the next few months.

“Boost of confidence among the foreign investors may result in increased inflow of foreign capital into the country through bond and equity markets, which might lead to a stronger INR,” said Rakesh Tarway, Head Research Reliance Securities.

Ace investor Rakesh Jhunjhunwala, Partner, Rare Enterprises, in an interview with CNBC-TV18 on Friday, said that it (upgrade) is a recognition of the fact that however disruptive in the short term the measures were, all the actions which the government took were correct, bold and required.

Jhunjhunwala said the mother of all bull markets has just begun and investors have nothing to worry about. Financials will be the biggest beneficiary including private, public sector banks from Moody’s upgrade.

The biggest advantage to India Inc. from the Moody’s upgrade, he said, is that it will allow India to borrow funds at a lower rate. A lot of funds which have a mandate to invest in countries with a specific rating can now invest in India.

Banks and NBFC are the borrowers of foreign funds and they deploy those funds in India. The rate reduction will have a direct impact on the cost of Funds which will have a direct impact, suggest experts.

“Moody’s India upgrade is extremely positive, and set up the floor for 11,000 on the Nifty and then the journey towards 12,000 in the medium term,” said Dinesh Rohira, Founder & CEO, .

“With rating upgrade and earning uptake in 1-2 quarters, GST benefits kicking in, the Indian economy has all it takes for the up move,”  he said.

HSBC said in a note that it expects both S&P and Fitch to follow suit with a similar one-notch upgrade of the India sovereign over the next 12 months. Market participants said sovereign rating upgrades by other agencies could boost sentiment further.

“Rating upgrade will help bring some benefits on cost of funds for overseas borrowers, encourage foreign capital inflows, boost overall sentiments apart from acting as a vote of confidence in current government’s reform policy and momentum. Indirect all this will help boost market sentiment,” said Gautam Duggad, Head of Research, Motilal Oswal Financial Services

However, there were some experts who differed.

Arvind Chari, Head, Fixed Income & Alternatives,Quantum Advisors, said the ratings upgrade seems to have come at a wrong time as the government is facing pressures on the fiscal front. Ratings changes are very slow, infrequent and at most times move with a lag to market expectations, he said.

“Markets should worry that the government now having received the ratings upgrade, may actually slacken and relax its commitment to reducing fiscal deficit, as per the stated plan – especially, at a time when investors seem to be worrying about the same as reflected in the increase in bond yields of more than 50 bps since August 2017,”said Chari.

Moody’s has only reaffirmed the fundamental logic that drives the present ‘hope trade’, which is that the economy is set for growth recovery.

This Bull Run, primarily driven by domestic liquidity, is likely to sustain for an extended period of time. Financialisation of savings and increasing preference for equity as an asset class are structural trends that are likely to get entrenched.

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