Fitch Ratings has upgraded its outlook on the Indian sovereign’s credit rating from ‘BBB-‘ negative to stable. This could not come at a better time for Indian bonds, which have been selling off due to slowing growth and a weakening rupee.
On June 12, Fitch revised India’s outlook upwards due to measures taken by the government to contain the budget deficit as well as its progress in addressing some of the structural impediments to investment and economic growth. For example, the central government fiscal deficit improved to 4.9% of GDP in financial year (FY) 2013, versus 5.7% in the previous year.
“The authorities have also begun to address structural factors that have weakened the investment climate and growth prospects, notably regulatory uncertainty, delays in government approvals of investment projects and supply bottlenecks, for example, in the power and mining sectors,” said Art Woo, Hong Kong based director at the ratings agency, in a note.
Fitch also said that the growth is likely to recover from a low of 5% in FY2013, to 5.7% and then 6.5%, in FY2014 and FY2015 respectively.
“This will take out the sense of gloom and doom around the Indian markets – predominantly in the domestic market. If you talk to foreigners and look at the flows, they are not quite as worried about India as the local investor base is,” said Rahul Bajoria, economist at Barclays.
However, over the last three to four weeks international investors have sold around US$3 billion in Indian bonds, according to a Mumbai-based bond trader. Since the news from Fitch yesterday, outflows have stopped and bond yields have risen. The 10-year sovereign benchmark was trading at 7.55% on June 11. It fell to 7.49% after the upgrade and is trading at 7.52% at the time of going to press.
In addition, the rupee was positively impacted by the news. By June 11 it had reached a record high of INR58.05 to the dollar, according to Bloomberg data, but it fell to INR57.75 on Wednesday evening. “It’s back to the INR58 level again today (June 13) but the immediate impact of the outlook upgrade was there,” said the trader.
Bond support
Immediately following the Fitch upgrade, the Securities and Exchange Board of India (Sebi) announced an increase of US$5 billion in the investment quota for long-term foreign investors in government securities.
“Today the government is likely to hold a press conference announcing some ease in FDI [foreign direct investment] rules. This series of actions is expected to have some positive impact,” said the Mumbai-based bond trader.
As well as the measures to increase foreign investor inflows, the central bank demonstrated its commitment to supporting the rupee on Tuesday, by intervening in the market and selling US dollars, according to local press reports.
“In coming weeks, we expect policy tools to be used to support sentiment, including further liberalisation of the capital account. Further possible measures may include limited RBI intervention, debt market liberalisation and a relaxation of FDI limits,” said Bajoria.
India’s offshore corporate bonds have been less affected by the negative outlook on the sovereign rating, but commentators believe the upgrade could draw in a larger investor base for deals as fears of a downgrade to sub-investment grade yield recede.
With two of the three rating agencies now with a stable outlook for India – Standard & Poor’s (S&P) still has a negative outlook – the move should be re-assuring for investors, says Sonal Varma, India economist at Nomura.
“A lot of investors were underweight India, so there could be a little bit of incremental buying coming from that side. Also it might bring in new buyers who were waiting in the wings, over the course of the next few months,” said Bajoria.
He believes that S&P may also revise its outlook to stable by the end of this year. “When all three ratings agencies do this, it will put aside all this talk and chatter about a downgrade and will attract a new investor base,” he said.
However, offshore bonds from Indian issuers have been well supported and have priced at competitive levels so far this year, despite the negative outlook, noted Manmohan Singh, head of DCM for India and Indonesia at RBS.
“International investors are quite well informed and take detailed assessment beyond just the ratings and the outlook. But this upgrade is a positive event in terms of sentiment and perception, particularly given the widening of spreads across Asia.” he said.
A number of corporates and financial institutions, such as Syndicate Bank and Canara Bank, have completed roadshows and several others are considering bonds as an option.
“Having said that there are not many issuers in India who have impending refinancing needs that will force them to issue bonds. So the market has to settle for a moment for us to even consider a sensible deal. The issuers will then evaluate the current levels and compare with other financing options,” he said.