Moody's Downgrades India's Credit Rating, MSMEs Shut Shops, and Top Cues in Focus Today

Wed, 3 Jun Pre-Open

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Indian stock markets ended on a strong note yesterday.

Extending gains to the fifth consecutive day, Indian stock markets edged higher even after Moody's Investors Service downgraded country's sovereign credit rating by a notch to the lowest investment grade with negative outlook.

Buying interest was seen as Prime Minister Narendra Modi assured that India would get its growth back.

Speaking at CII's annual session, Modi said making the economy strong post Covid-19 is the top priority now and that the government is making planned and systematic reforms.

At the closing bell yesterday, the BSE Sensex stood higher by 522 points (up 1.6%).

Meanwhile, the NSE Nifty closed higher by 153 points (up 1.6%).

The BSE Mid Cap index ended the day up by 1.2%.

While the BSE Small Cap index ended up by 1.8%.

Tata Motors share price was in focus yesterday as the company resumed operations across all its manufacturing plants.

NTPC share price was also in focus as the company announced its plan to foray into electricity distribution business and also offered to acquire 51% stake in two utilities of Anil Dhirubhai Ambani Group (ADAG) in Delhi.

Speaking of the current stock market scenario, note that the coronavirus impact has shaken markets worldwide. After all, 2020 has already seen one of the worst market crashes in history.

Naturally, there is an atmosphere of fear all round.

Is it time to sell stocks now? Will the correction get worse?

History has shown that after years like the one we had just now, the next 3 years are good for the markets. In fact, these corrections are the rare times when you find businesses with solid fundamentals at reasonable valuations.

If you can find good businesses that can survive the current crisis, you will do well in the long run.

As per Richa Agarwal, editor of our premium smallcap service Hidden Treasure, the Covid-19 crisis could be the best investing opportunity in small-cap stocks.

In the video below, she talks about the stocks that will do well despite the lockdown.

Tune in to know more...

Covid-19 Affected MSMEs Start Shutting Businesses

According to a survey by the All India Manufacturers' Organisation (AIMO), about 35% of micro, small and medium enterprises and 37% of self-employed individuals have started shutting their businesses, saying they saw no chance of a recovery in the wake of the coronavirus outbreak.

The other 32% of the MSMEs said that recovery would take around 6 months, while only 12% expect it in three months.

Last month, the government had announced various measures to help MSMEs, including collateral-free loans of Rs 3 lakh crore and a fund of funds for the sector that will invest Rs 500 billion as equity in small businesses.

The government's financial package has not reached the MSMEs and is also not adequate to make up for the loss of business activity during the lockdown period, AIMO said, adding that such a "mass destruction of business" was unprecedented.

Yesterday, the cabinet approved the expanded definition of micro, small and medium enterprises (MSMEs) and finalised modalities for the Rs 200 billion subordinate debt for stressed units, and Rs 500 billion fund to boost growth of the sector.

As per the new definition, a company with up to Rs 500 million investments and up to Rs 2.5 billion turnover is classified as a medium enterprise.

This is higher than the definition announced by finance minister Nirmala Sitharaman as part of the Rs 20 lakh-crore Aatma nirbhar Bharat package, which had pegged the investment limit for medium companies at Rs 200 million and turnover at Rs 1 billion.

Probe into Dealings of Closed MFs by Franklin Templeton

In news from the mutual funds space, the markets regulator has hired the services of a chartered accountant and forensic audit firm to probe into the dealings of six mutual fund schemes that were shut down by Franklin Templeton.

The Mumbai-based Chokshi & Chokshi LLP, which advises on tax, accounting, risk, and due diligence among other things, has been given the assignment.

The firm is likely to investigate if there were collusion between the fund house and bond-issuing corporates, instances of conflicts of interest of directors or senior officials, and transactions that were prejudicial to the interest of investors in the schemes.

The regulator has asked the audit firm to submit its report in 30 working days.

On April 23, Franklin Templeton Mutual Fund announced the winding up of six of its yield-oriented debt schemes, in light of heightened redemption pressure and lack of liquidity in debt markets, following the Covid-19 outbreak.

According to estimates, around 3,00,000 investors are impacted by Franklin Templeton's move to wrap up six of its yield-oriented debt schemes.

We will keep you updated on the latest developments from this space. Stay tuned.

Moody's Cuts India Credit Rating to Baa3

Moody's Investors Service cut long-term sovereign rating for India from 'Baa2' to 'Baa3', which is a notch above junk.

The global rating agency maintained its negative outlook, citing structural weaknesses, weak policy effectiveness, and slow reforms momentum even before the Covid-19 pandemic.

The change brings Moody's rating into line with Fitch and Standard and Poor's, both of which rate India BBB-, although they assign stable rather than negative outlooks.

Moody's had raised India's rating by a notch to 'Baa2' in November 2017. In November 2019, Moody's cut its outlook on India to negative from stable. A month later, Standard & Poor's had warned that if an economic recovery does not happen, a rating downgrade may follow.

A 'Baa3' rating is still investment grade, though it is the lowest rating in that grade.

Moody's latest action comes weeks after Finance Minister Nirmala Sitharaman presented the Rs 20 trillion stimulus package. The actual fiscal outlay of the package was less than Rs 2.3 trillion.

Moody's said implementation of key reforms, promised in Prime Minister Narendra Modi's first term, have been relatively weak and have not resulted in material credit improvements, indicating limited policy effectiveness.

The agency expects India's FY21 GDP growth to contract by 4% from 4.2% provisional estimates for FY20. It said that thereafter and over the longer term, growth rates will likely be materially lower than in the past.

Notably, India's GDP growth has been on a consistent decline after peaking out at 7.9% in Q4 of FY18 to 4.7% in Q3 of FY20, as can be seen in the chart below:

Declining GDP Growth for India

Interestingly, there's a silver lining in all this. India can become an outsourcing hub. The global slowdown will mean that countries like the US, will be looking out for low-cost outsourcing destinations like India.

Further, a lot of global buyers have already shifted to India to source ceramics, home appliances, fashion, and lifestyle goods.

Meanwhile, as per the reports, around a thousand foreign manufacturers want to relocate their production to India, a country they see as an alternative to China.

Here's an excerpt from one of the articles Tanushree Banerjee wrote on the Indian economic recovery:

• It's also a fact that India's importance in the global supply chain has never looked better. PM Modi himself referred to that.
  
  Therefore, utilising the stimulus package to tighten India's presence in the global supply chain will be the fastest way to move up the Swoosh index. Any delay or disregard would cost India dearly.
  
  True that Apple, Samsung and several smartphone manufacturers are already considering an expansion of their Indian capacities.
  
  But the land, labour, liquidity, and legal reforms cannot remain on paper if the Make in India dreams are to be realised.
  
  I expect to gather more cues about India's prospects on the Swoosh index over coming months.

Watch this space as Tanushree tracks these Rebirth of India megatrends closely.

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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