Moody’s upgrades India
Global Credit Rating agency Moody’s upgraded India’s sovereign credit rating by one notch from Baa3, the lowest investment grade rating to Baa2 on November 17. Moody’s also changed its outlook on the country from stable to positive, sending out an optimistic note to foreign investors interested in the country. Further, the agency also upgraded India’s local currency senior unsecured rating to Baa2 from Baa3 and its short-term local currency rating to P-2 from P-3. 
Following the announcement, Indian stock markets rallied and the currency appreciated. The benchmark Nifty Index gained 0.7% while the Bank Nifty hit record highs after a 1.1% surge. The rupee appreciated 0.9%. It also sent bond yields lower as a rating upgrade means further confidence in the government’s ability to service its debt obligations, thereby warranting low risks on sovereign bonds. Additionally, it also leads to a lower cost of borrowing for the government as well as Indian companies seeking funds from abroad at a time when interest rates in the domestic market remain high.
Companies to gain most
Export-oriented companies that need dollar-denominated debt stand to benefit most, as a higher credit rating would lead to favorable risk profile thereby lowering their cost of borrowings. Moody’s also upgraded long-term credit ratings of Export-Import Bank of India, HDFC Bank, Indian Railway Finance Corporation Limited (IRFC), SBI, BPCL, HPCL, Indian Oil , and Petronet LNG from Baa3 to Baa2.
Aashish Kamat of UBS India expects large-cap stocks like HDFC (HDB) and Reliance Industries and public sector banks like State Bank of India and Bank of Baroda to be the top beneficiaries from Moody’s rating upgrade. In a note to investors he stated, “There could be a direct 20 basis points to 50 basis points lowering in the overseas rate of borrowing for these companies.” In 2017 till date, these stocks have returned 52.3%, 69.7%, 36.1% and 20% respectively.
Kaku Nakhate, India country head, Bank of America believes the upgrade will give public sector enterprises, and banks a significant advantage to operate with lower interest rates. Further, it will also enable to the Indian government to borrow at cheaper interest rates to put their infrastructure related projects into action.
Ashish Vaidya, head of markets for India at DBS Bank expects Moody’s upgrade to drive flows to India’s bond markets. “A new set of investors may start participating in their bond sales particular after the rating upgrade,” he said.
“Top-rated Indian companies will be able to take advantage of the rating upgrade. These companies are likely to see marginal cost benefits when they will raise money from overseas markets.”
The biggest Indian companies by market cap are Reliance Industries, Tata Consultancy Services, HDFC Bank, ITC Limited and State Bank of India. These stocks have market caps of $91 billion, $79.8 billion, $72.7 billion, $48.4 billion and $44.9 billion respectively. In 2017 so far, these stocks have gained 69.7%, 16.7%, 52.3%, 8.4% and 36.1%.
ETFs offering exposure to India
Year to date, the MSCI India Index has surged 24.5% while the Indian benchmark Nifty 50 Index has gained 26%, outperforming most emerging markets.
Foreign investors seeking exposure in India could invest in country-focused ETFs that offer diversification through investment in a single US security. Alternatively, investors wanting direct exposure could consider ADRs of Indian companies.
Investors looking to make the most of the India growth wave through ETFs can consider the iShares MSCI India ETF (INDA), iShares India 50 ETF (INDY) and the PowerShares India Portfolio (PIN). YTD, these ETFs have returned 30.2%, 31.4%, and 30.7% respectively.
