Stocks, bonds and the rupee all showed signs of weakness on Friday after Moody's lowered India's outlook to negative from stable. The rupee tumbled 32 paise on Friday driven down by a strengthening dollar as also poor sentiment and closed the session at a three-week low of 71.285. Bond yields edged up with the old benchmark yield closing at a six-week high of 6.75% while the Sensex fell 330 points.
Some economists chose to downplay the downgrade pointing out that concerns about slowing growth and a widening fiscal deficit were overdone. Others, however, lowered their GDP growth forecasts sharply. While November has seen strong portfolio flows into the bond and equities markets - $652 million and $627 million, respectively, currency market dealers were cautious unsure of how flows would behave.
The yield on the new benchmark also closed 5 basis points higher at 6.56%, hitting the highest level since its October 2019 launch. Besides the downgrade, the bond market is also concerned about higher supply of government paper, given chances of fiscal deficit widening. Despite, sufficient liquidity and multiple repo rate cuts, bond yields have not budged.
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In the stock markets, the Bank Nifty rallied smartly throughout the day but gave up almost 300 points with much of the fall coming in late afternoon trade; dealers attributed the drop partly to profit- booking following the recent rally and partly due to Moody's downgrade of several banks.
Apprehensions that the economy would remain in a slowdown for a prolonged period necessitating cuts in earnings estimates also led to a sell-off in stocks, dealers said. The weaker currency, however, will help exporters including IT firms and pharma companies. The Sensex ended at 40,323.61 while the broader Nifty gave up 103.90 points to close at 11,908.15.