DebtFX - A Strong Week Ahead: India Ratings

Credit & Market Research report by India RatingsIndia Ratings and Research (Ind-Ra) believes that the weak US non-farm payrolls for September (142,000) will significantly decrease the chances a rate hike in 4Q15 and also will effectively rule out any hawkish commentary from the Fed in the October meeting. The Fed funds futures are now factoring in just a 30% chance of a rate hike in the rest of 2015, down from the 50% prior to the report. Unless there are significant positive data points in the October-November period, the Fed might be forced to postpone the December hike.The sharp fall in crude oil prices during the last week has been another key worry for the health of global economy. This has led to a sharp slowdown (to the extent of recession!) in several large emerging markets (Russia, Brazil, South Africa). The weak crude effect has also been felt in the Middle East economies with Saudi Arabia raising capital and withdrawing monies from global equity funds. The sharp drop in commodity prices led by the China slowdown has exacerbated the issue. On 2 October 2015, the US reported a fifth weekly decline in the US oil rig count, indicating crude could be bottoming. Any further fall in crude oil prices may be a risk to the global economy.Ind-Ra opines that with the chances of US Fed increasing rates moving down, the emerging market currencies including rupee to trade firm. While Indian exports continue to falter, the Reserve Bank of India’s (RBI) recent move to allow higher foreign portfolio investments (FPI) in government bonds and the rate cut should increase foreign interest in India and drive foreign institutional investments. It is worth noting that trade balance and current balance are typically much better for the second half and this should support the currency. While the rupee has outperformed most other emerging market currencies, Ind-Ra expects the trend to continue.FPI flows for 2QFY16 in the debt segment were fickle at USD34m. Ind-Ra’s analysis of bond markets within Asia suggests that the still-high real interest in India make Indian bonds one of the highest yielding segments (barring Indonesia) (Figure 1). This, against a backdrop of sound domestic fundamentals, is likely to shift bias of FPIs in favour of India.

Read More