Jul 4, 2013|
How will India's rating affect stock investors?
India today stands at a risk to be the first BRICS nation to get the 'junk' status for its sovereign rating. With the Indian government failing to put its act together to save the country from this disgrace, the global rating agency, Standard and Poor's (S&P) has threatened to peg down India's sovereign rating to junk status. The other two big rating agencies too share a negative outlook for India citing concerns over the deterioration in macroeconomic fundamentals of the nation.
The dire consequences of the downward spiral in credit ratings remind us of few such weak economies. The downgrades to junk status of the debt-ridden economies of Greece, Cyprus, Portugal and Ireland had created shockwaves in the global markets. Greece, for instance, found it quite difficult to reduce its deficit via borrowings since the downgrade ensured that investors shy away from investing in Greek bonds. Consequently, Greece was compelled to pay higher interests on its bonds to attract investors and raise money at higher costs. Junk status also led to increased restructuring of the existing debt making the country mired in debt crisis. Thus, junk status not only implies dearer money or difficulty in raising money, but also brings the threat of further downside to the economy.
Red flags have already been raised with respect to state of affairs of the Indian economy. In its fifth Financial Stability Report, the Reserve Bank of India (RBI) warns of the ramifications of the possibility of the ratings cut for Indian corporates and Indian banks. The junk status would make the overseas borrowings expensive both for the government and the corporations. Indian corporates are already facing the high-interest rate burden. Even the best rated corporates, for instance, are also compelled to pay an interest rate which is nearly 2-3% higher than the risk free rate. Ratings downgrade would further add to their woes impacting the availability and the cost of foreign currency borrowings. The same holds true with banks. The higher overseas borrowings costs as a result of ratings downgrade, would impact their margins in a big way. Thus, repercussions of a poor credit rating can be highly problematic and can adversely affect all the sectors of the economy directly or indirectly.
Most importantly investors need to be aware of companies that have substantial exposure to foreign debt. The bond issuances of several corporates including Tata Steel and Bharti Airtel are already rated as junk, although the sovereign rating is yet to face the disgrace. Thus, downgrade in ratings or even its likelihood should raise alarms in the minds of the investors who have invested in stocks of leveraged companies or ones with overseas debt exposure. Investors should also be particularly vigilant while investing in domestic corporate bonds and plan their investment strategies well.
||Shweta Daptardar-Mane, has an MBA (Finance) degree and over five years of equity research experience. She passionately tracks the Banking and Finance industry and follows the macro developments in the economy, particularly the central bank monetary policy. She is deeply inspired by not only Buffett's investment acumen, but also by his infectiously charismatic, down-to-earth persona. Shweta is the contributor to our large cap franchise, StockSelect.
More Views on News
Aug 10, 2017
IDFC Bank is taking steps to address contracting NIMs and successfully transition in to a retail bank.
Aug 10, 2017
Asset quality will be the key thing to watch out for going forward.
Jul 31, 2017
Almost 74% of the watchlist as provided by the bank of Rs 226 billion in FY16 has turned into non-performing assets.
Jul 6, 2017
Does the stock score on the value versus price equation?
Jun 27, 2017
Should one subscribe to the IPO of AU Small Finance Bank Ltd?
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407