Some feel rupee could go up to 63, but most see moderate upside

The first sovereign upgrade by Moody’s Investors Service in more than a decade is good news for India, and will reflect on its currency as well. While the perception is that the Indian rupee may get a boost by as much as 3.1 per cent by March, a majority believe the gains could be as modest as about half a percent amid overseas funds flowing in from the New Year, shows an ET Poll conducted among 22 market participants.

Opinion is divided on the currency movement due to global factors: While most respondents believe that bond yields may only fall to 6.75 per cent from the current levels of 7.05 per cent, India could derive long-term benefits from reforms such as the goods and services tax, bad loan resolution and the Real Estate (Regulation and Development) Act in the coming quarters. A cut in the supply of government securities will also add to the expected fall. Bond yields and prices move in opposite directions.

"The upgrade will trigger more fund inflows from next year," said Jayesh Mehta, managing director at Bank of America. "Global investors have different allocations across rating grades. With the sovereign rating improvement, a new bunch of investors may deploy more money in India from next year onward. Nothing significant is likely to happen ahead of the year-end vacation time."

Overseas flows are likely through foreign direct and portfolio investment (FDI, FPI) into equity and debt. Foreign portfolio investors have almost exhausted their combined investment limit of ?3.98 lakh crore for government and corporate bonds to the extent of 97-98 per cent.

The government may increase the limit next year amid expanding appetite for Indian debt securities. The rating upgrade will also shield the rupee from wild swings, a key factor for international investors.

"The rating upgrade came at a time when India’s macro fundamentals are a little weak," said Abheek Barua, chief economist, HDFC Bank. "There would be additional supply of capital through this move.

The rating improvement will help offset short-term impact of negative factors like inflation and fiscal worries, geopolitical risks leading to higher oil prices. Better days are expected to come over a period of time, not overnight."

Indian benchmark bonds have yielded the most this year among the Asia-Pacific pack excluding Pakistan, a country facing numerous economic hurdles. The benchmark yield is now at 7.05 per cent.

"The rating upgrade will have a profound impact on bond yields and lift the morose bond market sentiment," said Soumya Kanti Ghosh, chief economist with the SBI Group. "The greatest irony is that despite India’s improved fundamentals, bond yields have moved in a contrarian direction."

India’s bond yields are around 170 basis points (bps) higher than 2008 levels. A cancellation of open market operation (sales) by the RBI last Friday will also help check the supply side as bond yields are likely to rise by another five basis points this week alone. A basis point is 0.01 percentage point.

This calendar year, the rupee has ranked third in the Asian market pack in terms of total investment returns adjusted for interest rates, ahead of the Chinese renminbi, Thai baht, Japanese yen and the Philippine peso, trailing the Malaysian ringgit and the South Korean won, according to Bloomberg data. The local unit has returned about 10.50 per cent during the period.

India’s current account deficit (CAD) is expected to be around $40 billion, or 1.5 per cent of the gross domestic product (GDP) for this financial year, Nomura said in a report. The gauge increased sharply to $14.3 billion — 2.4 per cent of GDP — at the end of the April-June quarter.

"Rating companies are normally behind the curve... Substantial foreign money has already arrived in India following reform measures carried out by the government," said A Prasanna, economist at ICICI Securities Primary Dealership. "A sharp bond market rally looks difficult amid domestic fiscal worries."

The benchmark bond has jumped about 65 basis points this year while foreign portfolio investors have invested Rs 1.96 lakh crore in debt and equities during the period, the highest since 2014.