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Traders in India are yearning for the central bank to backstop the rupee and sovereign-bond markets after Moody’s Investors Service cut the credit rating to the lowest investment grade.

“This is definitely not welcome news and we could see some more foreign outflows,” said Ashish Vaidya, head of trading at DBS Bank Ltd. in Mumbai. “There will be a knee-jerk selloff in the rupee and bonds but we expect the RBI to jump in to curb any bouts of undue volatility.”

India’s long-term foreign-currency credit rating was cut to Baa3 from Baa2, Moody’s said in a late evening statement on Monday, citing policy challenges in addressing a prolonged slowdown and the deteriorating fiscal position. The outlook remains negative, it said.

The cut brings Moody’s rating on India on par with S&P Global Ratings and Fitch Ratings Ltd., both of which have a BBB- rating. Any downgrade by S&P and Fitch will hurt flows to a nation that relies on imported capital to fund investment. Already, global funds have yanked $14 billion from rupee bonds this year, the highest in emerging Asia.

READ: Foreigners Feel India’s Bonds Just When It Needs Them Most

An RBI spokesperson didn’t immediately respond to an email seeking comment.

“The RBI will have to come out with an explicit support for the bond market after this development, otherwise it’s going to be very tough,” said Vijay Sharma, executive vice president for fixed-income at PNB Gilts Ltd. He expects benchmark yields to climb by 15-20 basis points on Tuesday,

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The dollar was on the defensive on Tuesday as investors stuck to hopes of a global economic recovery despite heightened concerns over U.S.-China tensions and mass protests in many U.S. cities over the death of a black man in police custody.

The U.S. dollar's index against a basket of six major currencies (=USD) stood at its weakest level since mid-March, at 97.790.

The euro fetched $1.11295 (EUR=), little changed so far on Tuesday but holding near a 2-1/2-month high of $1.1154 touched on Monday.

Sterling traded at $1.2491 , having hit a one-month high of $1.2506.

U.S. manufacturing activity eased off an 11-year low in May and although the reading was weaker than forecast, it fit into markets' expectations that the worst of the economic downturn was behind as businesses reopen.

"There are some potential flash points such as U.S. demonstrations and China-U.S. tensions. But, on the whole, the market is still moderately risk-on," said Kyosuke Suzuki, director of forex at Societe Generale (OTC:SCGLY).

Against the safe-haven yen, the dollar was at 107.57 yen , stuck in a well-worn range between 106 and 108 over the last several weeks.

President Donald Trump said on Monday he was deploying thousands of heavily armed soldiers and law enforcement to halt violence in the U.S. capital and vowed to do the same in other cities if mayors and governors fail to regain control of the streets.

The protests erupted over the death of George Floyd, a 46-year-old African-American who died in Minneapolis police custody after being pinned beneath a white officer's knee for nearly nine minutes.

Market risk sentiment was hurt only slightly on Monday when Bloomberg reported that China had told state-owned firms to halt purchases of soybeans and pork from the United States, raising concerns that the trade deal between the world's two biggest economies could be in jeopardy.

The Australian dollar, often seen as a proxy bet on the strength of the Chinese economy, fetched $0.6794 , having reached its highest levels since late January.

The Reserve Bank of Australia is expected to keep rates on hold when it meets later on Tuesday.

The Chinese yuan stood flat at 7.1230 per dollar in offshore trade, near its highest levels in almost two weeks.

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The dollar was on the defensive on Tuesday as investors stuck to hopes of a global economic recovery despite heightened concerns over U.S.-China tensions and mass protests in many U.S. cities over the death of a black man in police custody.

The U.S. dollar's index against a basket of six major currencies (=USD) stood at its weakest level since mid-March, at 97.790.

The euro fetched $1.11295 (EUR=), little changed so far on Tuesday but holding near a 2-1/2-month high of $1.1154 touched on Monday.

Sterling traded at $1.2491 , having hit a one-month high of $1.2506.

U.S. manufacturing activity eased off an 11-year low in May and although the reading was weaker than forecast, it fit into markets' expectations that the worst of the economic downturn was behind as businesses reopen.

"There are some potential flash points such as U.S. demonstrations and China-U.S. tensions. But, on the whole, the market is still moderately risk-on," said Kyosuke Suzuki, director of forex at Societe Generale (OTC:SCGLY).

Against the safe-haven yen, the dollar was at 107.57 yen , stuck in a well-worn range between 106 and 108 over the last several weeks.

President Donald Trump said on Monday he was deploying thousands of heavily armed soldiers and law enforcement to halt violence in the U.S. capital and vowed to do the same in other cities if mayors and governors fail to regain control of the streets.

The protests erupted over the death of George Floyd, a 46-year-old African-American who died in Minneapolis police custody after being pinned beneath a white officer's knee for nearly nine minutes.

Market risk sentiment was hurt only slightly on Monday when Bloomberg reported that China had told state-owned firms to halt purchases of soybeans and pork from the United States, raising concerns that the trade deal between the world's two biggest economies could be in jeopardy.

The Australian dollar, often seen as a proxy bet on the strength of the Chinese economy, fetched $0.6794 , having reached its highest levels since late January.

The Reserve Bank of Australia is expected to keep rates on hold when it meets later on Tuesday.

The Chinese yuan stood flat at 7.1230 per dollar in offshore trade, near its highest levels in almost two weeks.

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Forecasters are calling for a second-quarter GDP contraction of at least 30%, according to the Blue Chip survey, while the model from the Federal Reserve Bank of Atlanta (GDPNow) calls for an much steeper 52% retrenchment. Yet, the S&P 500 index is down less than 7% this year after rallying more than 35% from its low point of March 23. There seems to be a huge disparity between the economy and the stock market.

There is a way to reconcile both numbers, however, if the economy turns around quickly and ends up the year nearly unchanged. In that case, the stock market rally would be justified and could even have some more room to go. Admittedly, this seems hard to believe right now. But is it possible?

Current economic numbers look decidedly dismal. As I showed in my previous post, some have shattered records by huge margins. Second-quarter GDP forecasts are correspondingly bleak. The contraction estimated by the GDPNow model is much worse than the Blue Chip average, but with numbers that large, the margin of error is certainly huge.

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