Rating upgrade to boost battered rupee: StanChart

The unexpected upward revision of the country's sovereign rating by Fitch today will strengthen the battered rupee which would also stem the fund outflow from the domestic market, Standard Chartered said.

"The unexpected shift in Fitch's rating stance towards the sovereign outlook is good news for the rupee that has been significantly weighed down by broad dollar strength, portfolio outflows and renewed current account deficit concerns in recent days.

"Technically, the rupee is overbought and is likely to extend the down-move witnessed since this morning on this development and the immediate support is at 57," Standard Chartered economists said in a note late this evening.

After the market hours, Fitch today revised the credit outlook to stable from negative but retained the rating at BBB- bringing cheer to the government struggling to arrest the rupee slide.

The agency said revised outlook cited government's efforts to contain fiscal deficit and other measures. "The revision of the outlook to stable reflects the measures taken by the government to contain the budget deficit, including the commitments made in the FY14 budget, as well as some, albeit limited, progress in addressing some of the structural impediments to investment and economic growth."

The rupee had yesterday touched a historic low of 58.98 against the dollar but recovered a tad to close at 58.36 on the prep talk by the government. Today, it recovered by 19 paise to close at 57.76 after RBI announced steps to check free-fall in rupee, raising the limit for online repatriation of export proceeds by over three-fold to $10,000.

StanChart further said this positive development should bring some relief to foreign debt investors, who have withdrawn around $3.27 billion from the debt marker since May 22.

"Given the favourable impact of the change in outlook on the rupee, we expect debt outflows to slow down," they said, adding whether this is a dip to buy the rupee or the onset of a more durable downtrend will depend on measures announced by the government tomorrow to boost capital inflows.

In the absence of substantial announcements, such as NRI bonds or FDI policy revamp etc, losses maybe limited, with the market awaiting the outcome of next weeks

Indian credits in the $bond space have underperformed the wider Asian investment grade space during the market sell-off of the last three weeks, the report said, adding the revision of the rating outlook should provide some respite to the Indian spreads in the near-term.