)
The recovery of the rupee and the equity markets over the last couple of trading sessions has proved to be short-lived after Standard & Poor’s said there was a more than one-in-three chance of a ratings downgrade for India and as fears of a war in West Asia roiled global markets.
While the Indian currency registered its third steepest fall of the financial year on Tuesday, the Bombay Stock Exchange Sensitive Index snapped its four-day winning run by dropping 651.47 points or 3.45 per cent to close at 18,234.66. The rupee fell 2.6 per cent against the dollar to close at 67.73 a dollar after breaching the 68 mark at which point the Reserve Bank of India (RBI) reportedly intervened.
“We have a negative outlook on India. We think the chance of a downgrade in the next one to two years is one out of three,” Kim Eng Tan, an analyst at S&P, said at a news briefing in Seoul. Tan called the chance of a downgrade of India higher than that of Indonesia where the rupiah fell to a four-year low on Tuesday. (BATTERED AND BRUISED)
The S&P warning was largely a repeat of what the agency had said in late August, and no missiles were reported to have landed in Syria, but Indian investors were so unnerved that the reports exacerbated a sell-off in the rupee and local stocks. The broader Nifty fell more than 4 per cent at one point.
Foreign Institutional Investors (FIIs) sold their holdings in domestic markets upon the news of missiles being fired in the Mediterranean, which resulted in a further rise in the price of crude oil. According to currency experts, the rupee is probably headed towards new lows unless the government announces some concrete measures to revive the economy.
“Markets got jittery about a possible sovereign rating downgrade by S&P. However, the possibility of a downgrade has been around for the past six months,” said Amish Munshi, senior fund manager and head of research, equities, Tata Mutual Fund.
The rupee has emerged as Asia’s worst performing currency and since the start of this fiscal it has depreciated almost 25 per cent against the dollar. “Domestic woes have emerged stronger. In addition to structural issues revolving around the current account deficit, outlook on growth and fiscal deficit is weak, pulling in the risk of a downgrade. RBI’s extreme support to the rupee through a liquidity squeeze, high short-term money market rates and the foreign exchange swap window to absorb oil demand have made no positive impact on the rupee,” said J Moses Harding, executive director and chief business officer at Lakshmi Vilas Bank.
The near-term outlook for the rupee is heavily dependent on the next meeting of the US Fed as the market is concerned about the tapering of quantitative easing. “The US Fed meeting in mid-September would define the future course for the rupee. If it is materially more hawkish, the rupee could breach 70 per dollar. Conversely, if it is dovish compared to market expectations, then we could even see the rupee strengthen,” said Brijen Puri, executive director and head of markets, JPMorgan.
Fund managers and analysts said there was more pain in store for investors, who remained concerned over the stability of the rupee and the slide in economic growth.
In global equity markets, stocks slumped tracking the sudden decline in European markets and a rise in crude oil. The clarification that the missiles had landed in the Mediterranean Sea and not in Syria helped markets in Europe erase a portion of their losses. But it had little impact on Indian financial markets. “We expect further downside in the markets from current levels because worsening macroeconomic conditions have raised the possibility of a sovereign downgrade,” said Tirthankar Patnaik, director & strategist, Religare Capital Markets. Foreign institutional investors (FIIs) net sold shares worth Rs 716.16 crore, while their domestic peers were purchasers to the tune of Rs 596 crore on Tuesday, according to provisional data. “The outlook for now continues to be cautious and volatility is expected to continue until the rupee stabilises,” said Munshi.
