Fitch warns of downgrade as confidence slips further--ET 23rd August 2013
MUMBAI: India's economic troubles may worsen after rating agency Fitch warned the country of a downgrade citing growing external imbalances and the difficulties in funding it due to reversal of global portfolio capital.
In a statement on Thursday, Fitch, the smallest of the big three firms, said that India and Indonesia risk negative rating action if confidence slips further. It is the first rating agency to issue such a warning after the turmoil in emerging market currencies made the rupee Asia's worst performing currency this year.
Emerging market stocks and currencies have been battered in the past 10 days on growing realisation that the Federal Reservewill cut purchases of bonds, squeezing the flow of liquidity to global markets.
On Wednesday, the minutes of the Federal Open Markets Committee (FOMC) showed that most members preferred a cut-back by the end of the year if US economic and business conditions improve. Fitch said that there is no rating action at this point of time, but warned authorities that they have to restore financial stability.
"Demand growth in excess of current supply-side capabilities could lead to a further widening in external imbalances. Moreover, rapid private-sector credit growth, widening fiscal deficits or sustained higher inflation could lead to a broader and more sustained loss of confidence among investors. This could potentially undermine economic and financial stability, and ultimately lead to negative rating action," the Fitch statement said.
The warning came on the day the Sensex vaulted 2.27%, snapping four days of consecutive declines. The benchmark Sensex has shed 1,400 points since last Thursday, while the broader Nifty lost. The rupee plunged to a low of 65.56 to the dollar on Thursday before climbing back to end the day at 64.55 on central bank intervention.
Well-known global investors such as Mark Mobius and Marc Faber have already said that a rating downgrade of India is a possibility if the government does not take steps to restore investor confidence.
Two days ago, Moody's said that its India sovereign rating of Baa3 incorporates macro-economic challenges of weaker growth, a fall in the rupee and the twin deficits.
"So while (the) rupee depreciation may be a new development, the factors that underpin it are not, and have been incorporated into India's Baa3 rating," credit ratings analyst Atsi Sheth said in an e-mailed response to Reuters.
The rupee has fallen 8.9% since May 22. Bond yields fell on measures taken by the Reserve Bank of India on Monday. RBI announced measures to soothe the long-term rates through purchase of bonds.
The benchmark 10-year 7.16% bond yield fell to 8.23% after touching a high of 8.58%. It had closed at 8.41% on Wednesday. Bond yields and prices move in opposite direction.
In a statement on Thursday, Fitch, the smallest of the big three firms, said that India and Indonesia risk negative rating action if confidence slips further. It is the first rating agency to issue such a warning after the turmoil in emerging market currencies made the rupee Asia's worst performing currency this year.
Emerging market stocks and currencies have been battered in the past 10 days on growing realisation that the Federal Reservewill cut purchases of bonds, squeezing the flow of liquidity to global markets.
On Wednesday, the minutes of the Federal Open Markets Committee (FOMC) showed that most members preferred a cut-back by the end of the year if US economic and business conditions improve. Fitch said that there is no rating action at this point of time, but warned authorities that they have to restore financial stability.
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The warning came on the day the Sensex vaulted 2.27%, snapping four days of consecutive declines. The benchmark Sensex has shed 1,400 points since last Thursday, while the broader Nifty lost. The rupee plunged to a low of 65.56 to the dollar on Thursday before climbing back to end the day at 64.55 on central bank intervention.
Well-known global investors such as Mark Mobius and Marc Faber have already said that a rating downgrade of India is a possibility if the government does not take steps to restore investor confidence.
Two days ago, Moody's said that its India sovereign rating of Baa3 incorporates macro-economic challenges of weaker growth, a fall in the rupee and the twin deficits.
"So while (the) rupee depreciation may be a new development, the factors that underpin it are not, and have been incorporated into India's Baa3 rating," credit ratings analyst Atsi Sheth said in an e-mailed response to Reuters.
The rupee has fallen 8.9% since May 22. Bond yields fell on measures taken by the Reserve Bank of India on Monday. RBI announced measures to soothe the long-term rates through purchase of bonds.
The benchmark 10-year 7.16% bond yield fell to 8.23% after touching a high of 8.58%. It had closed at 8.41% on Wednesday. Bond yields and prices move in opposite direction.
Metal stocks rallied across the board after China's manufacturing sector hit a four-month high in August. China's manufacturing Purchasing Managers' Index (PMI) rose to a four-month high of 50.1 in August, implying an expansion in industrial activity.
Some leading brokerage houses have already upgraded the metal sector to 'Overweight' from 'Underweight'. "We are upgrading the metal sector to 'Overweight' from 'Underweight'. The improvement in theglobal economy, along with a weak rupeemakes a powerful case for rerating in earnings," said Prabhat Awasthi, managing director and head of research, at Nomura Financial Advisories in a note on Thursday.
Shares of leading metal companies such asHindalco, Sterlite Industries, Tata Steel, andJindal Steel surged between 5% and 11%. Taders attributed Thursday's market rally to bargain hunting of stocks at lower levels.
The benchmark 30-share index, BSE Sensex rallied 407 points, or 2.27%, to end at 18,312, up nearly 540 points from the day's low. The broader 50-share index, NSENifty surged 105 points, or 2%, to close at 5,408.
Leading global brokerage house CLSA has warned that Nifty's next support level now comes at 4916 level, as the technical structure of the index has deteriorated following the fallbelow previous support level of 5500. The market breadth, indicating the overall health of the market, was positive. On BSE, 1,282 shares gained and 982 shares declined. A total of 139 shares were unchanged.
Technology and pharmaceutical shares rallied, on expectation that the depreciating currency will boost earnings. Leading software exporters such as TCS and Infosys surged between 2.5% and 3.5%.
Pharmaceutical majors like Sun Pharma, Dr Reddy and Cipla gained between 2.5% and 4%. Foreigners have also sold nearly $1.3 billion of Indian government and corporate bondsso far this month. Among blue-chip shares, ITC rose 2.4% on value buying after falling nearly 10% in the four sessions to Wednesday, while Bharti Airtel rose 4.8%. Sesa Goa, the Indian unit of oil and mining group Vedanta Resources, gained 13.1% on inclusion in India's benchmark index. Yes Bank dropped 5% on fears of foreign fund selling. FIIs hold about 46% stake in the bank.
http://economictimes.indiatimes.com/markets/stocks/market-news/fitch-warns-of-downgrade-as-confidence-slips-further/articleshow/21990554.cms?curpg=2
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