S&P Still Matters in Indian Bond and Currency Markets, Despite Everything…

Last Friday, Standard and Poor’s announced that they were removing India from negative watch, in turn affirming that country’s BBB- sovereign rating. This unexpected announcement immediately caused the Indian Rupee to jump 0.5% on the basis that India’s bond market will attract capital inflows now that the country remains investment grade.

The disappointing aspect of the event is that, despite the self-inflicted debasement of their reputation over the last two decades, investors still pay attention to S&P’s credit rating opinions. So much so, in fact, that the vast majority of fixed income investment mandate guidelines reference S&P, Moody’s and/or Fitch ratings when framing investment limits. For instance, it is common for sovereign bond mandates to require a minimum rating of BBB- or better to be a candidate security.

Why would any self-respecting investor obfiscate responsibility for defining their investible universe to the same agencies that help bring us the Global Financial Crisis? Moreover, the term ‘investment grade’ has some romantic connotation, but really, what does this mean in practice? Drawing a line between BBB- and BB+ to classify the former bonds as ‘investment grade’ while the latter are ‘non-investment grade’ is completely arbitrary.

Last Friday’s Rupee price action, however, clearly says that S&P’s investment grade status matters to someone. With Indian short-term yields exceeding 8% and the Rupee still 40% below its 2011 highs, it would seem that these people are prepared to push both the Rupee and the Indian Bond markets higher.