Moody’s downgrade upsets investors’ mood, Sensex falls

Selling intensified towards the closing bell on Friday after markets digested Moody’s downgrade of India’s sovereign outlook from ‘stable’ to ‘negative’ citing increasing risks to the country’s economic growth.

Consequently, Sensex settled 330.13 points lower at 40,323.61 while the broader Nifty lost 106.35 points to end at 11,905.70. This was Nifty’s steepest fall in almost a month after showing recovery from lower levels in the last few sessions.

At noon, markets appeared to have taken the downgrade in their stride briefly as Sensex scaled a fresh high of 40,749.33. But poor earning numbers by state-owned GAIL, Bharat Forge and Allahabad Bank along with Moody’s downgrade hurt the momentum.

“Rating downgrade forced investors to book profit in a volatile market and rupee weakened to a 3 week low. Given the subdued performance of the equity market during the year MF inflows fell to four month low while premium valuation of large & blue-chips is not attracting new funds in the market,” said Vinod Nair, Head of Research, Geojit Financial Services.

The government in response to the rating downgrade said India continues to be among the fastest growing major economies in the world, and that the country’s relative standing remained unaffected.

There were only six gainers during Friday’s volatile trade session. Yes Bank settled 4.66 per cent higher followed by IndusInd Bank which jumped 2.98 per cent. ICICI Bank, Kotak Mahindra Bank, Tech Mahindra and HCL Tech gained up to 2 per cent.

The top losers were Sun Pharma, Vedanta, ONGC, TCS and Hindustan Uniliver which ended lower in the range of 2-5 per cent.

Deepak Jasani of HDFC Securities said there is a possibility of further weakness in the Nifty in the coming sessions. Jasani said that technically, Nifty falling sharply from near the new swing high of 12,034 levels could indicate a reversal pattern at the highs.

Meanwhile, Moody’s Investor Services on Friday downgraded financial institutions closely linked to the Indian government’s sovereign rating from ‘stable’ to ‘negative’ after a similar rating action on India’s sovereign outlook which elicited a quick response from the government.

Moody’s on Friday revised the outlook of six systemically financial institutions including the State Bank of India and HDFC Bank to negative from stable.

The outlook was revised down for EXIM India, HDFC Bank, Hero FinCorp, HUDCO, IRFC, and SBI but was maintained at stable for Bank of India (BOI), Canara Bank (CAN), Oriental Bank of Commerce (OBC), Syndicate Bank (Syndicate) and Union Bank of India (UBI).

Explaining the rational for the dowgrade of EXIM India, HUDCO, IRFC, and SBI, Moody’s said that their final ratings are at the same level as the sovereign rating because of the uplift to their ratings, based on Moody’s assumption that these companies will receive government support in times of need.

“Consequently, if Moody’s downgrades the sovereign rating, it will also downgrade these companies’ final ratings. The close links between the four companies and the government is the key reason why Moody’s has changed the outlooks for these companies to negative from stable, after doing the same for the sovereign rating,” Moody’s said in a statement.

Moody’s justified its rating action on the country’s largest private bank, HDFC Bank by saying that the bank has large direct exposure to government debt and also as the Baseline Credit Assessment (BCA) of a bank is capped at the sovereign rating of the country that it operates in.

Moody’s said it expects that BOI, CAN, OBC, Syndicate and UBI to continue to enjoy a very high level of support from the government. Under these support assumptions, even if the sovereign rating is downgraded by one notch to Baa3, the support uplift should be sufficient to keep the final ratings unchanged at Baa3, it said.

“This situation is the key driver of Moody’s affirmation of the five banks’ ratings. Moody’s does not have any particular governance concern for all the issuers impacted by today’s rating action,” it added.

Mirroring the equity markets, the rupee fell sharply on Friday over the fresh growth concerns post Moody’s lowering of nation’s rating outlook to negative from stable. The rupee weakened by 32 paise to Rs71.28 a US dollar from its Thursday’s close of 70.96.

The rupee had earlier benefited in the recent weeks from strong inflow of foreign funds and better-than-expected quarterly earnings after the corporate tax cut.

Indo-Asian News Service