Sensex, Nifty overlook Moody’s rating downgrade; here’s why share market benchmark jumped 400 points

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Updated: Jun 02, 2020 12:50 PM

As the coronavirus pandemic stalled the economic activity in the country, the downgrade played more of a non-event for the markets

Sensex, Nifty, Moody's rating downgradeAnalysts believe that this rating downgrade was expected and this step was aligned to the ratings by other agencies

Indian stock market indices BSE Sensex and Nifty 50 were trading with excitement on Tuesday, overlooking Moody’s first credit rating downgrade in nearly 22 years- the last cut was in 1998 after India’s nuclear test. Moody’s Investors Service trimmed the rating from Baa2 to Baa3 and maintained its negative outlook on the back of risks from sustained low growth. In the session so far, the 30-share Sensex touched the day’s high of 33,729, an up move of over 1 per cent, while the broader Nifty 50 index reclaimed its crucial 9,990-mark and hit an intraday high of 9,956. So, what led markets to shrug off the downgrade effect? Analysts believe that this rating downgrade was expected and this step was aligned to the ratings by other agencies. Sanjiv Bhasin, Director at IIFL Securities says that markets have become smarter than Moody’s and S&P. “The foreigners are very aggressive in buying because the dollar has weakened and the unlock phase 1 has instigated hope that economic activities are back. All of these events will be temporarily ditch which will be the opportunity to buy because the undertone has become strong now,” Sanjiv Bhasin said. He further added saying that we are now in a global rally as Dow is up 42% and DAX is up 43%. “We think India is now going to be a catch-up rather than a laggard,” Bhasin added.

As the coronavirus pandemic stalled the economic activity in the country, the downgrade played more of a non-event for the markets. Even last year in November also, Moody’s changed its outlook to negative from stable for the country. “The reasons behind today’s up move were that the markets had already priced in this expected development and the Moody’s downgrade was more of an alignment of the rating agency with the other agencies,” technical analyst Milan Vaishnav CMT, MSTA, said. “Secondly, we are witnessing a risk-on environment where liquidity is chasing the stocks, and as this happens, it tends to disregard the perceived valuations,” Vaishnav added saying that all of these factors are giving resistance to any downsides as of now.

Market watchers are of the view that Moody’s downgrade was on expected lines and “it was largely accounted for by the markets which is why markets appear to have shrugged it off,” said Aamar Deo Singh, Head Advisory, Angel Broking Ltd. “Markets seem to have discounted Moody’s downgrade of India’s sovereign rating by a notch to the lowest investment grade, as it was along expected lines, post the deterioration in fiscal deficit numbers and slowdown in GDP growth rate,” 

Worth mentioning that in June 1998, Moody’s Investors Service downgraded India’s rating to Ba2 in the aftermath of the nuclear test. However, the rating agency upgraded India’s rating subsequently in February 2003, January 2004 and November 2017. After nearly 22 years, Moody’s has downgraded the country’s rating to the lowest investment grade.  

Where will markets head from now?

Sanjiv Bhasin says that from July onwards, we will see much better time as the economic activities have resumed. “We have already witnessed a 10 per cent rally in the markets in the last 5 days. So, given the circumstances, this is the very reasonable rally. We think India is now going to be one of the better performers as the US dollar has hit a 3-months low and money into the emerging markets can do well with India being one of the relative outperformers,” Sanjiv Bhasin added. 

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