Rupee, bonds continue to fall despite Moody's outlook revision to stable

The government and the RBI have been engaging with global bond index providers such as Bloomberg, JP Morgan and FTSE for inclusion of government bonds

Markets shrugged off the outlook revision by rating agency Moody’s as oil prices crossed $83 per barrel.  

The global rating agency revised India’s outlook to stable from negative stating that the risks of negative feedback between the real economy and financial system are receding. Higher capital cushions and higher liquidity also reduced the risk to the sovereign from banks and non-banking financial companies, Moody’s said. It also said that it expected the elevated general government debt to reduce in the next few years, preventing further deterioration of the sovereign credit profile.  

However, the bond yields continued to rise. The 10-year bond yield was at 6.28 per cent at 11.45 AM, its highest since mid-April 2020, and rupee was at 74.62 a dollar, lowest since July this year.  

The rupee and bond had closed at 74.44 and 6.26 per cent, respectively, on Tuesday.

"The revision in outlook reduces chances of India's rating being downgraded to junk and should bode well for the inclusion of Indian bonds in global bond indices," said Abhishek Goenka, managing director of IFA Global.  

The government and the Reserve Bank of India (RBI) have been engaging with global bond index providers such as Bloomberg, JP Morgan and FTSE for inclusion of Indian government bonds. It is estimated that inclusion in such indices will attract at least $30 billion of inflows to the Indian debt market.  

The RBI has also allowed foreign investors access through Fully Accessible Route (FAR) to some specified securities, estimated to be over $200 billion.  

However, there are issues around taxes that the government and the central bank are addressing, RBI governor Shaktikanta Das said in a recent interview.

So far in this calendar year, foreign portfolio investors have invested $13.15 billion in Indian markets, mostly in equities. They have invested $3.82 billion, including through voluntary retention routes in debt, and in hybrid securities.  

Moody’s outlook revision bolsters that effort and gives more confidence to foreign investors to allocate their funds towards India once the bonds are listed overseas, experts say.  

However, for now, the immediate concerns are many as the six member monetary policy committee starts its three day policy meeting.

“There’s not much in it (outlook revision). Market will give weightage to other factors which are against the rupee,” said Imran Kazi, vice president at Mecklai Financial.