MUMBAI : India is expected to outperform other emerging markets, benefiting from global investors who view the country positively due to an improvement in its sovereign rating outlook, analysts said.
While a sharp rebound in economic activity has supported investment sentiment after the devastating second wave of the pandemic, gradual fiscal consolidation will further strengthen sentiment, they said.
“Now that the growth recovery has been better than expected, Moody’s has changed the rating outlook. Stocks rating market prices long before the actual changes, so the current optimism and investment sentiment has already factored in this change, ”said Arvind Chari, chief investment officer at Quantum Advisors. Chari expects long-term foreign investors to stay affected in India and, over time, increase their investment.
Moody’s Investors Service on Wednesday raised the rating outlook of 18 Indian companies and banks, including Reliance Industries Ltd, Infosys Ltd, State Bank of India and Axis Bank, from “stable” to “negative”, in line with the change in sovereign outlook of credit rating.
On Tuesday, Moody’s revised India’s sovereign credit rating outlook to stable due to diminishing risks posed by the financial sector to the economy. The country’s credit rating, however, was maintained at Baa3, the lowest investment rating.
Indian stocks opened positively on Wednesday but fell to profit taking in the second half of the year. Analysts believe that external global factors could further spoil the party for Indian investors. “For India, although during reasonable inflation our markets are doing well, if oil prices rise further it may hurt India’s macroeconomic recovery,” Chari said.
According to Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, Moody’s revised outlook reinforces the fact that risks to the financial sector are now lower, as well as the visibility of sustained growth and gradual fiscal consolidation. “The tax situation is also better than it seemed at the start of the covid. Although there are structural problems on growth, some of the reforms and measures taken since the pandemic and the measures before it will be positive for growth in the medium and long term, “he said.
Moody’s forecast India’s economy to grow 9.3% in FY 22 from a contraction of 7.3% in FY 21. However, it warned that weaker-than-expected economic conditions or a resurgence of financial sector risks would put downward pressure on India’s sovereign rating.
Neeraj Chadawar, head of quantitative equity research, Axis Securities, said the improved outlook for the country is sentimentally positive for the market and will boost investment demand, which will be reflected in terms of flows in the months to to come. “This improved rating outlook will boost confidence in long-term flows in the Indian stock market as economic conditions turn positive due to the pace of the vaccination campaign. Earnings dynamics continue to be a crucial factor for market performance going forward, Chadawar said.
Although progressively positive, Moody’s action alone is unlikely to have a significant impact on Indian stock markets, said Nitin Bhasin, co-head of institutional equities and head of research, Ambit Capital. “At this point, there are risks to the pace of India’s economic recovery. First, rising global commodity prices will fuel inflation in India and may prompt the RBI to act. Second, there is still no visible sign of significant growth in investment, as capacity utilization is still well below 75%, which calls into question the sustainability of growth once pent-up demand is due. at the end of the year celebrations will fade. As a result, earnings could come under downward pressure, ”he said.
Despite the rating agency’s positive stance, Indian markets succumbed to selling pressure on Wednesday, with benchmarks falling 1%. Rising crude prices kept investors under pressure. BSE Sensex lost 555.15 points or 0.93% to 59,189.73. The National Stock Exchange’s Nifty Index lost 0.99% to 17,646. Oil prices hit a multi-year high above $ 83 a barrel on Wednesday, supported by OPEC + ‘s rejection of increase production more rapidly amid concerns about the world’s energy supply. Later in the session, however, crude retreated from its highs.
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