Indian equities had a kneejerk reaction to S&P's revision of India's economic outlook, but experts say that's all there is to it.
Standard & Poor’s today revised India's economic outlook to negative and reaffirmed its credit rating at 'BBB-' citing widening current account deficit, slowing investment and economic growth and unfavourable political environment.
On the back of the announcement, the Sensex tanked close to 150 points and the Nifty fell sharply below 5200.
However, Nilesh Shah of Envision Capital says there is no need to panic yet because this impact will only last for a day, a week at most. "It's something which is very well known, something which is very well discussed and it does not have any material impact on the earnings for corporate India, so to that extent I don’t think it has a significant impact for the direction of the market," he explained.
Gaurav Kapoor from RBS is of the same view, but believes this could put India on a backfoot compared to its Asian peers. Even though there hasn't actually been a ratings downgrade, he says this will have a dampening effect on assets.
On the other hand, Marc Faber says this may actually have a midly positive impact on the stock market.S&P's wake up call: Economists say onus is on govt to act
FII flows, rupee to be hit
In an environment where global investors are cautious due to weak global economic data and the resurgence of the eurozone crisis, this announcement will have the biggest impact on foreign inflows. Investor sentiment will take a beating, putting further pressure on waning FII flows.
FIIs have sold over Rs 700 crore in April as against pumping in over Rs 8,000 crore last month, indicating their falling demand for Indian assets.
Nilesh Shah believes flows will be impacted, but only for a short while because this was expected.
Kapoor also is of the view that the situation will not change drastically from here because flows are already tepid. He further adds that global investors will be more focused on what comes out of today’s Fed meet because that is more important than the immediate negative news from India.
On the currency front, this outlook revision could not have come at worse time. The rupee was already facing strong headwinds and this will further increase the downward pressure.
The rupee hit 52.65 soon after S&P’s announcement, but it has now stabilised around 52.60.
According to Abheek Barua of HDFC Bank, once the currency market fully digests the news, the downward pressure on the rupee will increase.
With a 24 month deadline to improve India’s economic fundamentals, experts say it’s high time the government jumpstarts its reforms process and tightens the belt around fiscal deficit.
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