Market shrugs off fears over India
Rating agencies’ warnings on India’s progress in strengthening its economy have been shrugged off, although there is general agreement that the country has much work to do.
Fitch Ratings revised India’s outlook from stable to negative last week over fears that a weak coalition government is moving too slowly in its structural reforms and its efforts to reduce its budget deficit.
The agency expressed concern over whether, in the context of an economy that is gradually losing momentum, India has done enough to pay down the deficit, despite good financial health.
Art Woo, a director of Fitch’s Asia-Pacific sovereign ratings group, says: “Against the backdrop of persistent inflation pressures and weak public finances, there is an even greater onus on effective government policies and reforms that would ensure India can navigate the turbulent global economic and financial environment.” (News analysis continues below)
Fitch’s revision of its outlook on India from stable to negative follows a similar move by Standard and Poor’s. Fund managers’ reaction has been largely one of unconcern, with Jupiter’s Avinash Vazirani pointing out that India, which has no foreign debt and expects GDP to grow by about 6% this year, has nearly the same sovereign rating as Spain.
The credit rating of Spain, which delivered its banking sector the choice of a €100 billion (£80 billion) bail-out-in-all-but-name in May, is BBB while India’s is BBB-.
Vazirani, the manager of the £255.9m Jupiter India fund, says the move by Fitch needs to be “taken with a pinch of salt”. “I always think markets are usually right,” he says. “If you look at what has happened to the 10-year bond yield, it has come down from when they put out the downgrade notice.”
The yield on Indian 10-year government debt peaked at 8.16% on June 18 but has levelled off to about 8.10%. This represents the lowest yield since February.
“Bond prices are rallying, which isn’t that surprising considering this [downgrade] is a largely academic concern,” Vazirani says.
A sense of ineffectiveness on the part of India’s coalition government is drawing a large share of the blame for the agencies’ attention on the country. The coalition is seen as failing to implement reforms and approve investment projects, such as those in the mining sector, which could spur GDP growth.
Andrew Kenningham, a global economist with Capital Economics, says: “The downgrade itself doesn’t necessarily mean anything right now but it reflects a growing concern a lot of people have in the market about the direction of India’s economy during the last year or so. It has become clear that growth has slowed substantially and the budget deficit, and the current account deficit, have widened.”
India continues to rely on commodity imports, while the government has been reluctant to approve unpopular measures such as reducing subsidy expenditure.
The slowdown in the rise of the oil price will ease tensions, but will do more to mask the problem than address the causes. The uncertainty surrounding the commodities sector has led Vazirani to take an underweight position in basic materials and oil and gas.
“Consumers and banking are our two large positions. Banking is one of the largest sectors in the index at around 27% and we are in line with this. The consumer in India continues to do well and all these companies should do well from falling commodities prices in addition to higher sales,” he says, also marking healthcare as a strong performer.
The ratings agencies have made their feelings on the pace of structural reforms clear and it will fall to the winner of India’s presidential election on July 19 to determine how these contentious issues are dealt with.
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