Shadow boxing by ratings agencies takes a toll on the Indian stock market

What we are witnessing today is a classic case of shadow boxing by two international rating agencies which is causing an upheaval in the Indian stock markets. Is our government to remain a helpless spectator to the butchery of investors in a civilized world?

On 9 November 2011, Moody’s Investors Service revised its outlook for India’s banking system to ‘negative’ from ‘stable’, thereby downgrading our entire banking sector. Moody’s cited an increasingly challenging operating environment for Indian banks due to high inflation and rising interest rates that could adversely affect their quality of assets, capitalisation and profitability.  Banking stocks on both national bourses were hammered down on 10th November, after the downgrade. The Bank Nifty fell 2.64% while BSE Bankex declined 2.62% in a clear example of how rating agencies can create havoc in the capital markets.  

Earlier on 3  October 2011, Moody’s had downgraded State Bank of India’s (SBI) bank financial strength rating (BFSR) or that is the bank’s standalone rating from  ‘C-’ to ‘D+’ on account of SBI's  low tier–1 capital ratio and deteriorating asset quality. This downgrade by a notch indicated “modest intrinsic financial strength”, while ‘C’ had denoted “adequate intrinsic financial strength”—a subtle difference it would seem.  

However, on 10 November 2011, another international rating agency, Standard & Poor’s (S&P)  upgraded India's banking sector from group ‘6’ to group ‘5’citing “a high level of stable, core customers’ deposits, which limit dependence on external borrowings. It also noted that the Indian government is “highly supportive of the banking system”. It also revised India’s economic risk score from ‘6’ to ‘5’ and assigned an industry risk score of ‘5’. The assessment is on a 1-to-10 with ‘1’ signifying the lowest risk and ‘10’ the highest.  

The diametrically opposite stand on India’s banking industry by the two leading international rating agencies within a space of two days shows how subjective these ratings are and how little they can be relied upon by the public. Is this a game of one-upmanship or shadow boxing at the cost of a country’s reputation and credit-worthiness?    On 5 August 2011, S&P downgraded the long-term credit rating of the US from ‘AAA’ to ’AA+’ on concerns about the government’s budget deficits and rising debt burden. This singular statement by a credit rating agency plunged world markets into economic turmoil, and investors all over the world lost billions of dollars. This was the first time that the US lost its premium rating.  S&P was under severe pressure from the US government, which accused the rating agency of making a $2 trillion error in its calculations. S&P admitted the error but said that it did not affect its decision to downgrade US debt rating. In the wake of this unprecedented downgrade of US debt and the rating agency’s stubborn stand despite the error committed by them, the Securities Exchange Commission of US is considering sweeping changes to the rules designed to improve the quality of ratings after their poor performance in the financial turmoil caused by the sub-prime crisis recently.  

Here is another goof-up committed by the same rating agency that defies all logic.  On 11 November 2011, S&P committed a blunder by accidentally sending automatic messages to some of its subscribers that it had lowered France’s AAA (Triple A) sovereign rating. Fortunately, this mistake happened just after the Paris bourse had closed that saved the day for the French investors. Within two hours, the agency hurriedly put out a statement saying “Following a technical error, a message was automatically sent out to certain subscribers indicating that France’s rating had been changed. This is not the case—the rating of the French Republic is unchanged at AAA, together with a stable outlook…..”

The entire episode was in such a bad taste that the French finance minister has demanded that it be made clear what caused the error and what the consequences may have been. The European Union Internal Market Commissioner Michel Barnier has called for a more rigorous, strict and solid regulation for credit rating agencies.

All these credit rating agencies, despite all their reasoning, are also fallible. The fact remains that these rating agencies are also manned by human beings who can make not only mistakes, but also blunders in their assessment and cause such embarrassment to countries, that it is time to take a cogent view on their usefulness to the world economy in general and the affected countries in particular. Against this background, it is incumbent on the part of the Indian government to consider taking steps to pre-empt any possible downgrade of India’s sovereign debt rating this year. S&P’s India credit rating is presently ‘BBB-’, which is an investment grade. Though India’s growth story is said to be intact according to the finance minister, economic indicators do not appear to be in fine shape. Any downgrading even by a notch will result in pushing India into the speculative grade, resulting in disastrous consequences for the economy in general and the stock markets in particular. This is not to say that the rating agencies should be muzzled, rather, the government should start a dialogue with them to ensure that they do not err on the wrong side, while at the same time take steps to improve the country’s financials by managing the fiscal deficit within the tolerable limits, if not at the targeted levels.  

(The author is a banking and financial consultant. He writes for MoneyLife under the pen-name ‘Gurpur’)





Nagesh Kini FCA

5 years ago

The MOF and RBI owe it to Indian citizens what steps are taken to pre-empt such faux pas, knowing what has happened to the US and French economies.


5 years ago

Time for the RBI to come up with its favorite knee jerk action - yet another increase in the interest rates - a panacea for all that's wrong!

Minor gains possible: Weekly Market Report

Medium-term trend shows a negative bias still

Lingering concerns about the European debt crisis along with weak corporate results of domestic companies and signs of a slowdown in the economy resulted in the market falling 5% and the benchmarks settling lower on all five trading days of the week. The 5.09% weekly closing loss on the Nifty was the maximum since the week ended 30 October 2009.

Paring all its gains in post-noon trade on weak European cues, the market closed lower on Monday. Weak corporate earnings were seen as the main cause of the decline on Tuesday. The poor show continued on Wednesday driven by a negative trend in the Asian markets. Despite food inflation for the first week of November falling by more than a percentage point, Spanish and French government bond yields touching their euro-era highs led to the market decline on Thursday. While the indices made a smart recovery from their intra-session lows on Friday, the market settled low for the seventh day in a row.

Overall, the Sensex tumbled 821 points to close the week at 16,372 and the Nifty declined 263 points to 4,906. We may see the Nifty making a small bounce back, which will not be sustained for too long. The medium-term trend shows negative bias.

The market slide resulted in all sectoral gauges ending lower. The BSE Realty index (down 11%) and BSE Capital Goods index (down 10%) were the top losers while BSE Healthcare and BSE Healthcare (down 2% each) suffered the least.

In the Sensex space, Cipla (up 9%) and Bharti Airtel (up 1%) were the top gainers whereas Jaiprakash Associates (down 18%), BHEL (down 15%), Mahindra & Mahindra (down 12%), Maruti Suzuki and DLF (down 11% each) were the major losers.

The Nifty gainers were led by Cipla (up 9%) and Hero MotoCorp (up 1%). The declining stocks were led by JP Associates (down 18%), BHEL (down 15%), Reliance Communications (down 13%), M&M (down 13%) and Siemens (down 12%).

Headline inflation hovered stubbornly near the double-digit mark in October, rising marginally to 9.73% from 9.72% in September. This, along with industrial output for September plunging to a two-year low of 1.9%, is expected to put pressure on the government to take a relook on the harsh monetary policy.

Meanwhile, giving some respite to the policymakers, food inflation eased to 10.63% for the week ended 5th November from 1.81% in the previous week. Concerned over the inflationary spiral, the government has said it is taking steps to remove supply bottlenecks and expects prices to ease from December.

Global research firm Macquarie has downgraded India’s economic growth forecast for the next fiscal to below 7% and has warned that the country’s gross domestic product (GDP) expansion outlook is on a ‘slippery slope’. Macquarie has cited “lack of policy reforms” and political compulsions as key reasons for the downgrade of its GDP growth projection for the fiscal FY12-13, beginning April 2012, to 6.9%, from 7.9% previously.

However, it has maintained its GDP growth projection for the country in the current fiscal, ending March 2012, at 7.4%.

On the global front, focus will be on the US as well as Europe as policymakers on both sides of the Atlantic struggle with debt and deficit. A high-profile congressional effort to cut US budget deficits appeared near collapse Friday as Democrats rejected a scaled-back proposal from Republicans that contained few tax increases.

European officials, meanwhile, have so far failed to convince investors that they have a plan to stop the contagion from their sovereign debt crisis. Italian, French and Spanish bond yields were under pressure earlier this week as markets looked for action from European leaders.


Magnitude of the fall unexpected, but a temporary bottom likely this week

The bears have made inroads in the bull camp and one has to see how the bulls handle the pressure in the F&O expiry week. The 5,144-5,185 points range will now prove to be a tough nut to crack in contra trend rallies in the very short term

S&P Nifty close: 4905.80

Market Trend

Short-term: Down    Medium-term: Sideways     Long-term: Sideways

The Nifty opened better for the week but started declining from day one instead of 17th which was our anticipation in the last week’s strategy. It broke through the crucial support level of 5,169 points which triggered bull liquidation as well as bear hammering. The Nifty lost a whopping 263 points (-5.09%) on significantly higher volumes. The sectoral Indices which outperformed the market were BSE TECk (-2.08%), BSE Healthcare (-2.12%) and BSE IT (-2.26%) while the ones which underperformed were BSE Reality (-11.19%), BSE Capital Goods (-9.99%), BSE Power (-9.59%), BSE Metal (-7.43%) and BSE Oil & Gas (-6.86%). 

The weekly Histogram MACD which had turned down last week, fell sharply, but is still above the median line. This implies that though the bulls have frittered away the advantage their hopes have not been totally extinguished. However, a big effort in now required on their part to stem the rot as well as avert the catastrophe, at least for the time being. With the last week’s effort the bears have raised a few questions which now the bulls need to seriously address.

 Here are some key levels to watch out for this week.


  • As long as the S&P Nifty stays below 4,990 points (pivot) the bulls will remain under pressure.
  • Support levels in declines are pegged at 4,752 and 4,600 points.
  • Resistance levels on the upside are pegged at 5,144 and 5,382 points.

Some Observations
The bulls have surrendered the advantage last week and the onus is now on them to take the battle to the bear camp.
1.    Resistance in rallies is pegged from the recent tops of 5,168-5,169 points.
2.    Last week the Nifty got support in the “gap area” between 4,827-4,861 points which is now crucial.
3.    The 5,380 level is the crucial resistance level (trendline in lavender) to watch out for this week.
4.    A temporary bottom is envisaged just prior to the current F&O expiry and a subsequent recovery.

The bears have made inroads in the bull camp and one has to see how the bulls handle the pressure in the F&O expiry week. A temporary bottom is expected around the 23rd which could trigger off some short covering. The magnitude of this recovery will depend upon whether the recent lows around 4720 hold. Contrarians with an iron will can do some bottom fishing near the above mentioned date for a contra trend rise only. The 5,144-5,185 points range will now prove to be a tough nut to crack in contra trend rallies in the very short term.
Vidur Pendharkar works as a Consultant Technical Analyst & Chief Strategist,


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