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On Tuesday, Indian bonds widened on the secondary market after Moody’s downgraded the country to Baa3

June 2, 2020
Although the downgrade was expected as S&P Global Ratings and Fitch Ratings already rated India at BBB-, the negative outlook is a concern for investors. 

Analysts predict a further downgrade within 6 months. A continuation of the downgrades will put India in a high-yield territory. As a result, quasi-sovereign credits of the country, which are quite active issuers of dollar bonds, in a dangerous position.

Although things won’t change fundamentally, investors will have some difficulties marking the bonds as high-yield. It may lead to the fact that investors won’t be able to hold bonds. 

In the near term, bankers don’t anticipate lots of supply from India in the offshore market. Even before the downgrade, Indian issuers were away from the primary market due to regulatory restrictions on the yield of new bonds.

The restriction equal to 450bp over Libor makes it difficult even for borrowers with an investment-grade rating to sell bonds when markets are unstable.