S&P re-rating should buffer rupee when US Fed raises rates

With global rating agency Standard & Poor’s (S&P) raising the credit rating outlook for India, the rupee is seen as less volatile in reaction to the US Federal Reserve’s rate increase, expected in 2015.

Experts believe there would be some reaction when the US Fed does move but it would be a limited impact, as investors believe India is viewed better than its peers.

“India might attract additional capital flows after S&P's decision and that shall support the rupee. Investors are putting money in Indian assets because they see growth.

However, the day the Fed announces a rate rise, there might be a minor knee-jerk reaction, due to which the rupee will see some impact. But the broad range for the rupee in 2015 is seen at 59-61 a dollar,” said N S Venkatesh, executive director and head of treasury at IDBI Bank.

S&P has revised its outlook on India’s sovereign rating to stable from negative, while reaffirming the rating at BBB-. The change was because it felt a stronger political mandate improved the ability to implement reforms, spur growth and improve its fiscal performance. Besides, S&P cited a strong external profile. With this, all three major rating agencies now rate India as investment grade, with a stable outlook.

On Friday, the rupee rebounded sharply from a one-and-a-half month low, hit early after S&P raised the sovereign rating outlook, aided by the recovery in equities.   

“We continue to recommend a short-term overweight foreign exchange weighting on the rupee in regional foreign exchange portfolios, and expect it to outperform most Asian peers, even in the face of a broad dollar move,” said Standard Chartered on Friday.

There is an expectation that based on strong US data, the Fed will start raising rates. “Sometime in the second quarter of 2015, the US Fed might hike interest rates. I see the rupee trading in the band of 57-61 in 2015. However, this is also dependent on Ukraine-Russia tensions being under check,” said a chief currency dealer with the state-run bank.

But experts agree the Reserve Bank of India will not allow the rupee to appreciate significantly from current levels, even if there are opportunities driven by the India growth story.