Traders pin hopes on RBI support after Moody's cuts India rating

[NEW DELHI] Traders in India are yearning for the central bank to backstop the rupee and sovereign-bond markets after Moody's Investors Service cut the credit rating to the lowest investment grade.

"This is definitely not welcome news and we could see some more foreign outflows," said Ashish Vaidya, head of trading at DBS Bank in Mumbai. "There will be a knee-jerk selloff in the rupee and bonds but we expect the RBI (Reserve Bank of India) to jump in to curb any bouts of undue volatility."

India's long-term foreign-currency credit rating was cut to Baa3 from Baa2, Moody's said in a late evening statement on Monday, citing policy challenges in addressing a prolonged slowdown and the deteriorating fiscal position. The outlook remains negative, it said.

The cut brings Moody's rating on India on par with S&P Global Ratings and Fitch Ratings, both of which have a BBB- rating. Any downgrade by S&P and Fitch will hurt flows to a nation that relies on imported capital to fund investment. Already, global funds have yanked US$14 billion from rupee bonds this year, the highest in emerging Asia.

An RBI spokesperson didn't immediately respond to an email seeking comment.

"The RBI will have to come out with an explicit support for the bond market after this development, otherwise it's going to be very tough," said Vijay Sharma, executive vice president for fixed-income at PNB Gilts. He expects benchmark yields to climb by 15 to 20 basis points on Tuesday, he said.

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