S&P downgrade hits rupee, bonds

According to dealers, the S&P’s downgrading of India outlook from `positive’ to `stable’ and forecast of lower GDP growth on account of hike in petroleum prices caused nervousness in the market. The net disinvestment by foreign institutional investors in capital markets also increased the dollar demand.

S&P had on Tuesday revised the outlook on India’s double-`B’ long-term foreign currency issuer credit rating to stable from positive, citing worries over the country’s worsening fiscal situation. The country’s decision-makers, cutting across all major political parties, have been unable to build a consensus in favour of measures to correct weaknesses in public finances and modernise India’s pervasive and largely unreformed public sector, it added.

India’s government bond market, keenly awaiting a revival after being subdued through most of the current fiscal year, is facing uncertain times again.

Government securities have shed gains made earlier this month as a slew of recent negative economic news dented trading sentiment and drove buyers away, traders said. The downward revision by Standard & Poor’s (S&P), fiscal concerns reiterated by the central bank and fresh pressures on the rupee have reined in bond bulls and cast doubts over future market movements.

Prices of actively traded bonds were down 0.4 per cent in afternoon trade from Tuesday’s highs. In the preceding three weeks, prices were up by about 1.3 per cent. Overnight funds rates have risen to 9.50-9.75 per cent, above the 8.5 per cent central bank repo yield, the benchmark for call money rates.

Currency traders attributed the weakness mainly to S&P’s ratings outlook revision and continued uncertainty over global oil prices. Dealers expect the current bond market uncertainty to continue till the rupee shows some signs of settling down again. It is currently around six percent weaker against the dollar than at the start of 2000.

Analysts said the revision could slow down foreign currency flows into India, hurting the rupee. "Fiscal worries have also put the market off," added a treasury official with a state-owned bank.

Rating outlook on L&T, RIL, Telco revised: Standard & Poor’s has revised the foreign currency sovereign rating outlook of Larsen & Toubro Ltd, Reliance Industries Ltd and Tata Engineering & Locomotive Co Ltd to stable from positive on the back of similar adjustment in the long-term foreign currency issuer credit rating outlook of India.

The `BB’ long-term foreign currency ratings of the three companies have been affirmed, S&P said in a release here today. At the same time, the `BB+’ long term local currency rating of Tata Engineering & Locomotive Co Ltd was affirmed, while the local currency outlook remains negative, it added.