S&P Affirmation to Comfort Global Investors

S&P Global Ratings brightened up a rather careworn Indian summer, endorsing New Delhi’s ability to regain over the long term its leadership status as a global growth powerhouse that deserved to draw more foreign funds than any other competing destination.

The affirmation of North Block’s long-term ratings by S&P should prompt more global fund inflows into Asia’s third biggest economy, where assets remain relatively inexpensive despite their recent climb from late-March lows. The immediate impact of S&P’s stamp of approval on India’s long-term prospects will likely be felt in the bond and currency markets.

S&P has reportedly made a balanced decision, taking into consideration both the macro parameters and the strong democratic framework.

The rupee is likely to trade in the range of 75-76 a dollar, dealers said. The US Federal Reserve’s statement will now be keenly watched.

Foreign portfolio investors have net bought $2.55 billion in June reversing the trend of net selling in the preceding three months.

The benchmark bond yielded 5.77% Wednesday, compared with 5.78% a day earlier. Although the latest unscheduled RBI policy rate cut triggered a fall in rates, yields are likely to extend their southward journey amid optimism over S&P affirmation.

The spread or differential between top-rated public sector bonds and private sector bonds is now at about 80-90 basis points, compared with 100-110 bps about a month ago. The gauge is expected to compress further.

A section of global investors turned apprehensive after Moody’s had cut India’s rating to the lowest in the investment bracket. Unlike Fitch or S&P, Moody’s had gone ahead, raising India’s rating by one notch about two-and-a-half years ago.

Any further cut in the sovereign grade will drag New Delhi to sub-investment grade, a rank that will likely prompt fund outflows instead.

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