Credit Suisse downgrades India to underweight

“We raise our Malaysia Overweight from 1.1x benchmark to 1.2x on positive commodity exposure, cheap multiples, and the market’s safe-haven status. We trim our Korea Overweight from 1.2x to 1.1x benchmark due to high oil imports, and lower Singapore from 1.4x to 1.2x on a less hawkish stance by the Fed. We reduce Thailand from 1.2x to 1.1x on a potential hit to tourism from Russia and Europe,” Credit Suisse said. 

The key assumptions for these tactical changes, according to Credit Suisse, include longer-than-expected high oil prices, the Fed hikes slower than anticipated, but the terminal points for the end of this year and 2023 do not change much, or it hikes too much and pushes the US (economy) into a hard landing.

Brent crude of $120 a barrel, Credit Suisse estimates, could add $60 billion to India’s import bill. Price rises for gas, coal, edible oils, and fertilisers could add another $35 billion. Inflation, as a result, could be higher by 100 basis points (bps).

“In total, the current account could fall by close to 3 percent of GDP. If oil stays above $120, the hit would be bigger. A weaker current account could magnify a previously diminishing vulnerability to Fed rate hikes and global bond yields. Historically, when India’s current account deficit was large, market correlations with US bond yields was lower than recently, when a stronger current account led to more favourable correlations,” the Credit Suisse note said.