India rating upgrade reflected in market valuations: Luke Spajic, PIMCO

Luke Spajic, head of portfolio management for emerging Asia at PIMCO believes Moody's upgrade of India's sovereign rating will not lead to dramatic inflows from foreign investors overnight, in part because India has been a well followed story.

India’s rating upgrade is largely reflected in the valuations of both credit and equity markets, said Singapore-based Spajic in an e-mail interview. Excerpts:

Q. What are your thoughts on the rating upgrade by Moody's on India? Was it expected and do you think this paves the way for further confidence on Indian economy?
It was a long time coming, but the rating upgrade came a tad sooner than anticipated.The Modi government is making some tough yet truly necessary reforms, like demonetization and the GST. Speaking frankly, the fruits of these reforms are yet to be tasted. We believe India is marching in the right direction. The bank recapitalisation, if targeted well and implemented with rigour, should help reignite the credit cycle and lead to more confidence.

Q. The recent economic data has pointed towards slowing growth and rising inflation. Is that a worry for you?
The economy has had to adjust to reforms that have created frictions. Growth dipped and should bounce back into the 7s. The terms of trade benefits from low oil prices are fading somewhat. On inflation, investors are less concerned about a mild uptick in CPI, they are more focused on the RBI sticking to the policy targets and range. Confidence will come from the central bank reacting robustly, when needed.

Q. Do you think foreign flows into India which have been tepid could return as a result of the upgrade?
India has been a significant beneficiary of Emerging Market flows this year. The ratings upgrade will not lead to dramatic inflows overnight, partly because India has been a well followed story for a while. In addition, on the bond side, foreign participation limits are close to being at maximum permitted levels. We would recommend a modest increase in these limits over time.

Q. What about valuations of Indian markets?
From a capital market standpoint, India’s rating upgrade is largely reflected in the valuations of both credit and equity markets. To put this into context, credit markets the world over have performed strongly until a recent bout of weakening. Volatility is picking up, so investors will be scaling positions more diligently.