After S&P's negative rating outlook yesterday, Nizam Idris of Macquarie Bank believes that its implications can be far reaching if other rating agencies also follow suit. Mulling about a possibility of a downgrade in the absence of reforms, Idris expects the rupee to hover around the Rs 52 to Rs 54 per dollar rate.
In an interview with CNBC TV-18, Nizam Idris said that although there is a possibility of an actual downgrade after S&P's negative rating, initially it is just based on sentiments and it is just a move to put the rating on a negative watch.
Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video.
Q: What did you make out of the observations from S&P yesterday and would you say that it increases the risk, if any, for the currency market?
A: Yes obviously. Moving the credit rating outlook to negative is a negative event. In the first place, it is also important to remember that India do not have an external debt situation where the government issues dollar debt. Therefore, the implication of that rating downgrade, if it were to happen, would be on the funds flowing into the local debt market and the local equity market.
And with India's negative current account deficit, you are really looking at potential capital outflow as well. There is a potential negative implication of that.
Q: Is it largely on account of sentiment or do you think there is a real possibility of S&P going for an actual downgrade?
A: I think initially its just sentiment but, S&P's move to put India's rating to a negative watch could mean an actual negative downgrade. But, I think we have to also remember two things here - S&P is just one of the three rating agencies, if the other two were to follow as well, then I think the implication is larger and finally a move to negative outlook is different from actual downgrade.
If we do actually get a downgrade then we have to be mindful that this is a downgrade not just from B to B -ve, but it is a downgrade from investment rating to a junk rating for Indian bonds. From my estimates that is around USD 40 billion worth of Indian rupee corporate bonds held by foreigners, round about USD 15 billion of government bonds held by foreigners are at risk, if there was downgrade by 2 or 3 rating agencies. On top of that the sentiment from there could also affect the investment into India's equity market which is bigger, which is a lot larger than the bonds market.
Q: How much of this bad news is in price with the rupee dollar already at 52.50?
A: As you saw yesterday, the immediate reaction was actually quite muted and for me I think that is a reflection that the market was somewhat expecting this. But this is just a move to put the rating on a negative watch; I think the implication would be larger when the actual downgrade happens. Now for me, if the Indian government does not do anything about fiscal consolidation, and the window for that is quickly closing on them, then I think the market will gradually move forward.
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