The Indian rupee is joining the broader selloff in emerging markets on Thursday as investors seek shelter in traditional safe-haven assets, particularly the US dollar. Analysts have been bullish on the rupee’s near-term future, but a combination of credit downgrades and a huge drop in the global equities market put a damper on the emerging market currency.
On Thursday, Standard and Poor’s Global affirmed India’s long-term foreign and local currency sovereign credit rating at the lowest investment-grade level. S&P Global also kept its stable outlook on the economy. Overall, India’s long-term rating was held steady at BBB- and its short-term rating was unchanged at A-3.
S&P Global wrote in its statement:
S&P’s stable outlook reflects its expectation that the Indian economy will recover following the containment of the COVID-19 pandemic, and maintain its sound net external position. While risks to India’s long-term growth rate are rising, ongoing economic reforms, if executed well, should keep the country’s growth rate ahead of peers.
Expect the government’s fiscal deficit to touch 11% of GDP in the current year to March 2021 on the back of pandemic related spending.
This comes one week after Moody’s Investors Services reduced India’s sovereign credit rating to one notch above junk status. Citing a prolonged economic slowdown and an increase in domestic debt levels, Moody’s slashed its rating from Baa2 to Baa3.
The Bank of America recently came out as being “quite bullish” on the rupee amid signs of a “risk-on momentum.” Due to the massive amounts of liquidity being injected into financial markets, traders have been more confident in investing in these high-risk, high-reward currencies. This is why the rand, the rupee, and several others surged in the second quarter.
The rupee joins many other emerging market currencies to slump on Thursday. Concerns over a second wave of the coronavirus and a gloomy Federal Reserve prompted investors to dive into the greenback, which explains why the US Dollar Index reversed its losses and is up 0.4% to 96.32. The index, which measures the buck against a basket of currencies, has slumped over the last month and erased its 2020 rally. With a fragile and uncertain global economy, could the dollar reclaim its gains?
Have the EM currencies peaked? Or is this just a temporary slump as investors weigh their options?
The USD/INR currency pair rose 0.39% to 75.97, from an opening of 75.68, at 17:16 GMT on Thursday. The EUR/INR edged up 0.05% to 86.16, from an opening of 86.11.