The yield on benchmark bonds eased on Thursday as S&P upgraded India’s sovereign rating to ‘BBB’ from ‘BBB-’, citing economic resilience and sustained fiscal consolidation. The rating upgrade was a relief to the bond market as it has been witnessing a huge sell-off since the last RBI policy, said market participants.
The yield on the 10-year benchmark bond fell 8 basis points (bps) to close at 6.40% on Thursday, the biggest fall in two months. The yields ended at 6.48% on Wednesday. The yields fell as much as 10 bps to 6.38% during the day.
Rating upgrade lifts sentiment
The upgrade of India reflects its buoyant economic growth, against the backdrop of an enhanced monetary policy environment that anchors inflationary expectations. Together with the government’s commitment to fiscal consolidation and efforts to improve spending quality, we believe these factors have coalesced to benefit credit metrics, S&P explained the rationale behind the rating upgrade.
“This is very positive for the market and it will boost some sentiment in the market,” said a dealer at a private sector bank, adding that sell-off will likely end and yields will sustain at this level.
Relief rally but global risks remain
The bond market had been in a sell-off mode on account of no rate cut expectation in the current financial year. It touched a four-month high of 6.51 on Wednesday followed by the heavy-selling by players such as mutual funds.
“There were some short positions in the market, which has been covered today (Thursday) followed by the upgradation,” said Ritesh Bhusari, deputy treasury head at South Indian Bank.
According to Anurag Mittal, head of fixed income, UTI Mutual Fund, “Today’s rally was a relief reaction to the upgrade as market positioning was on the lighter side. There needs to be stability on the external front for a more sustainable rally.”
“As our credit profile further strengthens and we gain inclusion in more global bond indices, we can attract more foreign inflows, further diversifying our debt markets,” said Mittal. However, he added that more inflows will depend on exchange rate stability and inclusion in more indices.
However, market participants await the outcome of the Donald Trump-Vladimir Putin meeting. If the meeting disappoints, it will have a negative impact on the market, they said.