Moody's rating downgrade unlikely to rattle markets, say experts

'It was expected that Moody's would align back India's rating with Fitch and S&P'

The sovereign rating downgrade by Moody’s from Baa2 to Baa3 was expected, and it is unlikely to unsettle the markets in a major way on Tuesday, said experts.

But there can be some kneejerk reaction in the spot markets, which the Reserve Bank of India (RBI) can take care of. “It was expected that Moody’s would align back India’s rating with the other two rating agencies (Fitch and S&P). India continues to remain investment grade, and this downgrade should not materially impact the markets,” said Harihar Krishnamurthy, head of treasury at First Rand Bank. 
 

Besides, the central bank has been quite active in the currencies and bond markets of late, and should be able to step in to arrest any undue volatility.

“There will be no major reaction. Yes, there can be some kneejerk actions, but the RBI can take care of that,” said Jayesh Mehta, head of treasury at Bank of America. “Bonds have been trading weak anyway, and in the currency markets, the RBI has been intervening regularly, as evident from the rising reserves,” said Mehta.

The 10-year bond yields closed at 5.82 per cent, around three basis points higher than its previous close. The rupee closed at 75.55 a dollar, up from its previous close of 75.62 a dollar. The latest data showed that the foreign exchange reserve increased by more than $3 billion in just a week, ended on May 22. India’s foreign exchange reserve now stands at more than $490 billion. So, the RBI has plenty of resources to fight a sudden pressure on the rupee, currency dealers say.

Also, the RBI has been buying bonds from the secondary markets; since March, the central bank has bought more than Rs 1.65 trillion worth bonds without announcing it. The head of markets of a global multinational bank said Moody’s downgrade doesn’t mean much. It is a rating alignment, not downgrading below others. India continues to remain investment grade. 

The standalone downgrade also does not impact international fundraising, because lenders follow their own assessment. The rating agency assessment matters only when there is an odd one out on the lower side. So, if two are low and one is high, the high is ignored. But if two are high and one is low, the rating is considered low. However, in India’s case, all three ratings are now the same.

India’s plan of getting into global bond indices won’t be in jeopardy, too, as such indices have very little to do with ratings, and more with how much access investors have in the instruments and what is the liquidity profile of the debt instruments. India has identified six bonds where investors can invest as much as they want to. A change in rating doesn’t affect this.

The markets are also not very worried about rating changes by S&P and Fitch because just as Moody’s upgrade didn’t impact their ratings, a downgrade is unlikely to impact their thinking.

However, there is a possibility that all three can downgrade subsequently based on India's circumstances. “But that stage has not come yet, because all rating agencies will wait for the Covid-19 impact to get out of the way. Rating downgrade thoughts can come only in the fourth quarter, as all multilateral agencies are expecting an improvement from the December quarter. If India can’t improve when the world is improving, there can be a rating downgrade concern, not before that,” said the expert, requesting anonymity.