According to a Bloomberg report, S&P said there was more than a one-in-three chance of an India ratings cut within two years. S&P currently has a BBB-minus rating on India with a negative outlook. A downgrade would push Asias third largest economy to junk status. International rating agencies Moodys and Fitch also have BBB- rating on India but with a stable outlook.
Meanwhile, after recovering in the past two sessions, the rupee plunged 3.4% on Tuesday to touch an intra-day low of 68.26 against the dollar, before recovering slightly to close at 67.73 to the dollar, 2.6% below Mondays close. The domestic currency has declined more than 22% since May 22 and 8.1% in the last month, the steepest decline among 78 global currencies, according to Bloomberg.
Not surprisingly, foreign institutional investors (FIIs) chose to take risk off the table, selling a net $106 million on Tuesday, with long-only funds also offloading stocks. Since May 22, when the US Federal Reserve first hinted at an early tapering of QE3, FIIs have sold $2.6 billion worth of stocks; they had bought $14.2 billion worth of shares between January 1 and May 21.The Sensex is now down 2,067 points or 10.18% since July 23. wiping out R6.8 lakh crore in market capitalisation. Foreign investors have pulled out $870 million from equities and $1.39 billion from debt in the last one month alone.
S&Ps belief that chances of a downgrade are higher for India than Indonesia spooked investors, observed Andrew Holland, CEO, Ambit Investment Advisors. Holland pointed out that S&Ps warning together with other negatives such as the rupee depreciation, weak Q1 GDP numbers and weak factory activity data dragged stocks lower. The Sensex shed 651.4 points on Tuesday or 3.4% to end at 18,234, while the Nifty was down 209 points or 3.77% to 5341.
Bank of America-Merrill Lynch had cautioned two weeks ago that any significant sell-off from overseas investors could bring Indian markets crashing down since FII ownership in Indian markets was at an eight-year-high. According to news reports, Russian radar detected two ballistic objects that were fired towards the eastern Mediterranean from the central part of the sea on Tuesday, indicating war was imminent in the region.
While most of the major Asian markets have lost ground, India remains the regions worst-performer in the year to date. The BSE Sensex has shed a whopping 24% in dollar terms in 2013 while its Asian peers have fared much better Chinas benchmark index Shanghai Composite has fallen just 4.74%, while South Koreas Kospi is down 6.4%. Hong Kongs Hang Seng (-1.2%), Taiwans Taiex (up 2.4%) and Japans Nikkei 225 (up 17.2%) have held up quite well. One reason for this has been the weak currency. The rupee touched a historic low of 68.85/$ on August 28. The Reserve Bank of Indias special window which supplies dollars directly to oil companies, effectively taking away $300-400 million in daily dollar demand had helped arrest the fall somewhat. However, with equity and debt outflows continuing, the rupee has resumed its fall.