Markets close higher for fifth day in a row

Markets close higher for fifth day in a row

Indian stocks shrugged off the latest sovereign downgrade and closed with gains for the fifth straight session on Tuesday.

The BSE Sensex rose 522.01 points, or 1.57%, to 33,825.53, while the 50-share Nifty index gained 1.56% to 9,979.10 points.

The gains came despite Moody’s Investors Service cutting India’s sovereign credit rating by a notch from Baa2 to Baa3, the lowest investment grade, with a negative outlook on Monday evening.

Analysts said the downgrade is unlikely to impact the market materially since much of the recent highs are largely due to the abundant liquidity in the global financial system.

Moody’s latest ratings cut is consistent with other ratings agencies, all of whom now rate India at the lowest investment grade level. The markets were likely anticipating a downgrade given Moody’s had moved India’s outlook to negative back in November 2019

Currently, S&P and Fitch Ratings rate India at BBB- with stable outlook, the lowest investment grade. Another downgrade will push India’s ratings to junk.

However, BofA Securities said that India may not fall below investment grade due to three primary buffers. For starters, the Reserve Bank of India’s (RBI’s) high forex reserves are expected to cushion the Indian rupee from excessive fluctuations. Second, the finance ministry will likely recapitalize public sector banks through non-fiscal levers such as issuing recapitalisation bonds and/or using the RBI’s $127 billion revaluation reserves. Finally, a good harvest season this year should boost rural incomes and demand.

BofA Securities said the downgrade was driven by risks during a sustained period of relatively low growth, further deterioration in the fiscal position and stress in the financial sector. “Its negative outlook reflects dominant, mutually-reinforcing, downside risks from deeper stresses in the economy and financial system that could further erode fiscal strength," it added.

Historically, across several countries, ratings actions have had muted impact on interest rates and currency beyond the immediate term. After the Moody’s upgrade in 2017, bond yields barely moved over the next few days. “Perhaps, markets tend to adjust real-time to the evolving macroeconomic and debt dynamic. In fact, more often than not, trends in growth, credit cycle, direction of monetary policy, Fed’s stance, etc are far bigger drivers of bond yields and exchange rates," said Edelweiss Securities..