Moody's ratings upgrade to boost FPI investment in debt market

FPIs have pumped in over $22 bn in debt market this year compared with $8 bn in equities

Global rating agency Moody’s upgrade of India’s sovereign ratings is likely to boost inflows from foreign portfolio investors (FPIs) into Indian equities, albeit marginally. The demand for Indian bonds, however, will surge, even as existing FPIs in the debt market benefit from softer yields.
 

FPIs have pumped in over $22 billion into the debt market this year, compared with $8 billion into equities. Taiwan, Mexico, South Korea and China have got a higher share of equity inflows from FPIs than India.

“Indian bonds have remained attractive this year, owing to the high nominal yield and appreciation in the rupee. Both factors amount to a significant appreciation in bond values. Add Moody’s rating upgrade and the demand for India debt will only increase. Existing debt investors also stand to benefit from the softening of the yields,” said Tushar Pradhan, CIO, HSBC Asset Management.

In a vote of confidence in the current political leadership, Moody’s Investors Services on Friday upgraded India’s sovereign ratings from the lowest investment grade to a notch higher. Demonetisation, introduction of the goods and services tax and measures to resolve banks’ bad asset issue were cited as reasons.

“Since India does not officially borrow in the international market, the impact for government borrowing will be limited. However, corporate borrowers will benefit as interest costs ebb,” said U R Bhat, managing director at Dalton Capital Advisors (India).

Yields on 10-year government bonds softened to 7.049 per cent on Friday from 7.062 a day before.

An improved rating is expected to boost investors’ confidence and put the country’s equity market within the investment mandate of more global fund managers. “The upgrade will put India on the map of overseas investors who do not invest below a certain threshold rating,” said Vikas Khemani, president and CEO, Edelweiss Securities.

While the Sensex rallied over 400 points intra-day on Friday, it gave up some of the gains to end at 33,342, up 236 points, or 0.71 per cent, justifying assertions of market watchers that gains for the equity market from the upgrade may be limited.

“The markets have been factoring in the improvement in India’s macro stability for some time now, and the credit spread and yields reflected that. The upgrade will boost the sentiments but we don’t expect any major material change in foreign investor inflows or the cost of capital for corporate houses,” said Gautam Chhaochharia, head of India research at UBS.

According to experts, the impact on overseas inflows into equities will be marginal as these investors have the propensity to take on a much higher risk than that suggested by the ratings. Also, investors into equities do not look at ratings per se, but factors such as improvement in corporate earnings and valuations.

“Moody’s upgrade should improve foreign investors’ sentiment toward India. However, over the medium term, foreign flows, especially into equities, are likely to depend on corporate earnings,” said Manishi Raychaudhuri, Asia Pacific equity strategist, BNP Paribas.

Nonetheless, India’s move to the second-lowest level of investment grade comes even as most emerging markets languish at junk or the lowest level of investment grade, according to experts.

India also offers a relatively better stability over some of the other emerging markets, as it doesn’t face a serious fiscal, monetary, foreign exchange or political issues. Also, with corporate earnings being a function of interest cost, FPIs may start finding Indian equities attractive again if rates remain low.