Equity traders and investors in domestic markets do not foresee a 'US-like credit rating downgrade of debt' for India, with the upgrading of India's stock market by Goldman Sachs calming anxious nerves on Dalal Street, after Standard and Poor’s (S&P) delivered a jolt.
Stock brokers say if their clients were staying away from stocks as of now, it had more to do with panic selling by foreign institutional investors (FIIs) in the backdrop of a slippery global situation, than fear of India's debt downgrade. Nobody wants to catch a falling knife, they said.
Late last Friday, S&P, the global ratings agency, downgraded its US sovereign rating to AA+ from AAA, with a negative outlook. On Monday, S&P also said that India's debt situation, among other Asian countries, was being closely monitored by them. S&P's move against the US and its statement on India saw panic selling. The benchmark indices, the Sensex on the Bombay Stock Exchange and the S&P CNX Nifty of the National Stock Exchange (NSE), which fell nearly three per cent, recovered significantly during the last hour of trading.
S&P says inflation remains India's biggest challenge, which could push up credit costs and dampen economic growth. Continuing the fiscal consolidation policies in the next financial year would be a key challenge for India, it says, and another global slowdown would create a deeper, more prolonged impact than the earlier one.
"The implications for sovereign creditworthiness in the Asia-Pacific would likely be more negative than previously experienced and a larger number of negative rating actions would follow,” S&P said.
SUNNY GOLDMAN, MERRILL
Brushing aside the concerns, Goldman upgraded India to "marketweight" after keeping an "underweight" rating for over a year. Goldman cited a likely improvement in the macroeconomic situation, lower oil prices, attractive stock valuations and the government's recent initiatives to push policy reforms.
Among Asian equity markets, Goldman Sachs placed an 'Overweight' rating on China, Indonesia, Malaysia and Taiwan; kept Korea, Hong Kong, Philippines, Singapore and India at 'Marketweight' and Australia, Japan and Thailand at 'Underweight'.The US investment bank said Indian equity markets may moderately outperform the Asian region on a six-month basis, as the price to earnings valuations for the MSCI India index are just at 14 times forward earnings, it said in its note. Goldman Sachs had held India at "underweight" for over a year, based on inflation risks, concerns over valuation and policy tightening overhangs.
Also Read
"The latest move by the RBI to raise the repo rate by 50 basis points was a clear sign, in our view, that the central bank is vigilant in bringing down inflation expectations," Goldman said in a note. The investment bank also said that government reforms were showing traction, citing the enhanced foreign investor limit for corporate debt, freeing petrol pricing and the recent draft released on land acquisition for industry.
Goldman found support on its stance on India by another US bank, Bank of America Merrill Lynch. In a note, Merrill said, "We would advise investors to ignore inevitable chatter about India's 'external vulnerabilities' as the world becomes a more and more volatile place. In our view, the RBI has sufficient fire power to fend off contagion as any other emerging market."
During the Lehman collapse, Merrill had always argued against the fashionable "vulnerability" rankings that simply added up current account deficits and forex reserves to short-term debt ratios. "The reality, surely, is far more complex! Not surprisingly, India (and Indonesia), that topped such lists, weathered the Lehman crisis best (along with China). Why? Because India follows a very different paradigm of domestic demand-led growth than most other export-led Asian economies. The very domestic demand that widens the current account deficit also attracts its financing," said Merill.
EXPERTS
Experts in India are of view that India's credit rating by S&P, currently below countries like Spain and Ireland, should be upgraded. S&P's India rating on local currency long-term debt is BBB (stable), poor compared to the AA of Spain's and A- rating of Ireland. This, when India's gross external debt is just over three per cent of gross domestic product, while that of both Spain and Ireland is over 50 per cent.
"It is highly unlikely that India's rating could be lowered further. The country is at risk when international crude oil prices are as high as $150 a barrel. Given the current scenario and RBI's recent aggressive stance, inflation is set to fall and yet growth will not suffer in major way. But it is very crucial that government go full-steam on reforms and key bills pending to be cleared are passed in the monsoon session," said Dharmesh Mehta, managing director of institutional equities at Enam Securities, a top broking and investment banking firm.
"If one goes by Goldman's views, there is more upside to Indian markets than downside from current levels," said Sudip Bandhyopadhyay, president at Destimoney Securities.
In the absence of any major buying interest, FII selling has seen the benchmark Sensex fall five per cent in just three trading sessions. Foreigners, mainly exchange traded and hedge funds, have sold equity worth nearly Rs 3,000 crore in August so far, with more than half coming in the past two trading sessions.
Mehta says it is time to be back in equities, once FII selling subsides. "This is a good opportunity for retail investors to buy stocks with a long-term perspective. Valuations are attractive and the much awaited correction has finally happened," Mehta said.
"Valuations for domestic stocks are increasingly becoming attractive. Corporate earning downside may not be much. Highly leveraged companies will underperform and banks and capital goods companies will outperform," said Sameer Kamdar, chief executive officer of ASK Investment Managers.
"The dollar's expected depreciation is set to reduce India's import bill on oil and fertilisers. This, in turn, will strengthen India's fiscal condition by reducing the subsidy bill significantly," said G Chokkalingam, executive director and chief investment officer at Centrum Wealth Management.