Inflation, CAD to rise further on crude worries despite ratings upgrade: HDFC Bank

MUMBAI: All may not be hunky dory with a sovereign ratings upgrade by a major global ratings agency. A rating upgrade may ease bond yields and also bring in more capital flows. But rising crude oil prices may spoil the party says a report by HDFC Bank.

HDFC Bank has hence revised its inflation forecast for FY’18 from 3.2% to 3.4% and its CAD forecast from 1.2% of GDP to 1.4% of GDP.

In a time when investors remain concerned about rising inflationary risks and fiscal worries, the rating upgrade is likely to lead to some downside movement in the bond yields. For the rupee, this means, some risks related to rising crude oil prices could be mitigated with higher capital flows on account of the rating upgrade and lift in investors’ sentiment, said a report released by the bank post the sovereign ratings upgrade by Moody’s.

The 10-year benchmark yield has already softened by 10 bps today and the rating upgrade makes our year-end target of 6.8% more likely. Today the rupee has appreciated by 0.8% to around 64.8 levels against the dollar.

Both valuation gains and renewed investors’ interest on account of the rating upgrade could give the government a good opportunity to go ahead with its revenue generating programs at a swift pace (disinvestments, recap bonds etc.)

Given India’ dependence on imported oil (India imports close to 80% of its oil consumed), rising oil prices are likely to impact India’s current account position, inflation readings, growth and monetary policy stance in the months ahead, it said.