Indian Rupee Weakens As Moody’s Downgrades India’s Credit Rating

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The Indian rupee is weakening across the board on Thursday after the country received a downgrade to its sovereign credit rating. With the emerging market facing a severe financial crisis in the middle of the coronavirus pandemic, analysts are not confident that India can weather the economic storm. But one bank believes the rupee could appreciate in the near future.

Moody’s Investors Service announced in its latest credit assessment report that India would be slapped with a downward revision to its sovereign credit rating. Moody’s reduced it from Baa2 to Baa3, which is a notch above junk status. The global rating agency cited a prolonged economic slowdown and skyrocketing debt as reasons for its decision.

Overall, it maintains a negative outlook for the new sovereign rating.

The cut to Baa3 from Baa2 was not driven directly by the impact of the coronavirus but that the pandemic had amplified vulnerabilities in India’s credit profile that were present and building prior to the shock.

Worsening government finances as the coronavirus continue to hurt the economy.

However, a Bank of America strategist is “quite bullish” on the rupee as he envisions “significant room” for the currency’s appreciation. Although the rupee has weakened more than 5% against the greenback so far this year, the rupee has shown signs of a “risk-on momentum” as investors are willing to park their money into high-risk vehicles. Emerging market currencies are typically more volatile, but with vast amounts of liquidity pumped into financial markets, investors’ risk appetites have increased.

While recent economic figures do highlight a rebound, they are falling short of estimates.

The IHS Markit manufacturing purchasing managers’ index (PMI) came in at 30.8 in May, up from 27.4 in April. But the market had penciled in a reading of 38. The services PMI also rose to 12.6 last month, up from 5.4 in the previous month. Analysts expected a PMI of 23.

The USD/INR currency pair rose 0.16% to 75.46, from an opening of 75.34, at 16:58 GMT on Thursday. The EUR/INR advanced 1.01% to 85.49, from an opening of 84.62.

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