The Telegraph
Since 1st March, 1999
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No jitters for debt

Mumbai, Sept. 20: There is a feeling that financial markets will remain insulated from Standard & Poor’s salvo, fired because the agency believes India must be ticked off for its burgeoning debt burden and feeble finances.

Bank officials find the timing of the downgrade intriguing. “That it has happened now makes most of us believe that the agency is representing the interests of large international investors who are keen to see reforms back on track”, a senior banker told The Telegraph.

“They are putting pressure on the government to hasten divestment, which has been virtually derailed after the Cabinet Committee on Disinvestment put off a decision on privatisation of BPCL and HPCL,” he added.

Whether the pressure will work is a question that is yet to be answered. However, bankers are sure last night’s rap will have very little impact on India’s rupee debt.

The reason is that it is mainly banks, financial institutions, insurance companies, provident funds and trusts that pour money into government securities.

Foreign institutional investors (FIIs) can also invest —up to 100 per cent in case dedicated debt funds and 49 per cent if they happen to be equity funds — but numbers given out by Sebi show they have remained a fringe force. “They are almost non-existent as far as the debt market goes,” says P. H. Ravikumar of ICICI Bank.

The worst-case scenario could be a fall in foreign direct investment (FDI). “Generally, foreign investors would not like to bring FDI when the country’s sovereign currency rating dips to junk status,” Ravikumar said.

The blow could also affect companies who have raised foreign currency debt abroad as their yields might change in the secondary markets. However, unlike in 1991, when foreign banks issued advisories to clients to take out foreign currency deposits forced the government to pledge its gold, things are in better shape now.

The saving grace is that the rupee is not fully convertible and it cannot pounded by speculators in the way pound was savaged by George Soros.

Only a few domestic players traded in government securities until recently, and most invested for the long term. This has been changing of late, with may banks setting up treasuries to trade in gilts. Perhaps, the most liquid of the long term instruments, liquidity in gilts is also aided by the primary dealer network set up by the central bank and the RBI’s own open market operations.

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