Reliance on rupee-denominated government bonds and India's robust forex reserves mitigate the risk to India's sovereign credit profile from rupee fall
New Delhi: The sharp depreciation in rupee’s valuation is unlikely to impact India’s sovereign credit profile as rupee-denominated government bonds and robust foreign exchange reserves mitigate the risk, William Foster, vice president—Sovereign Risk Group—at Moody’s Investors Service told Mint today.
“The impact of rupee depreciation on India’s sovereign credit profile is mitigated by the currency composition of government debt and foreign exchange reserve buffers. The government relies nearly entirely on local currency-denominated financing, with under 4% of its debt denominated in foreign currency compared to a median of 37% for BAA-rated sovereigns," Foster, who is Moody’s India sovereign analyst, said in an email response to Mint’s queries.
Recent heightened investor risk aversion across emerging markets and the widening of India’s current account deficit to 2.4% of GDP in the June quarter—driven by higher oil prices and robust non-oil import demand—have contributed to the rupee’s 13% fall since the beginning of 2018, making it the worst performing emerging market currency.
A Standard and Poor’s spokesperson refused to comment on the developing situation. Both Moody’s and S&P refused to comment on the timing of India’s next ratings review.
S&P has assigned the lowest investment grade of BBB– for India, with a stable outlook, citing a sizeable fiscal deficit, high general government debt and low per capita income.
Moody’s last year raised India’s sovereign rating from the lowest investment grade of Baa3 to Baa2, and changed the outlook to “stable" from “positive", on expectations that the government’s continued focus on economic and institutional reforms will—over time—enhance India’s high growth potential.
Additionally, S&P—in a 16 July report—said downward pressure on its India ratings is possible if (1) GDP growth disappoints; (2) net general government deficits rose significantly; or (3) the political will to maintain India’s reform agenda significantly lost momentum.
“Upward pressure on the ratings could build if government reforms markedly improve its net general government fiscal out-turns and so reduce the level of net general government debt. Upward pressure could also build if India’s external accounts strengthen significantly," it added.
According to Moody’s Foster, India’s External Vulnerability Indicator (EVI) at 65% is also relatively low compared to other large emerging markets and Baa-rated peers. “Although foreign currency reserves, at around $375 billion as of mid-August 2018 are off their peak, they remain significantly higher than the $247-$258 billion seen in 2013. This large foreign currency reserve buffer provides additional policy space and flexibility for RBI to manage external shocks and reduce the risk of sustained and large portfolio outflows and pressure on the currency," Foster said.
External Vulnerability Indicator indicates a country’s capacity to meet its external debt obligations over the next year (accounting for potential withdrawals of non-resident deposits) with existing foreign reserves.
On India’s growth outlook, Foster said despite external headwinds from higher oil prices and rising interest rates, growth prospects remain generally in line with the economy’s potential. “We expect India’s real GDP to remain on course to grow by about 7.5% in 2018 and 2019. Growth is supported by strong urban and rural demand and improved industrial activity. The increase in minimum support prices (MSPs) for kharif crops, should help support rural demand," he added.
On India’s fiscal position, Foster said, higher oil prices add to short-term pressures, following cuts in the goods and services tax (GST) on some items and relatively high increases in MSPs for some crops. “We see risks that the central government fiscal deficit will be wider than budgeted. However, temporary fiscal slippage, if any, will not offset robust nominal GDP growth and a large domestic financing base that will keep the government’s debt burden broadly stable," he added.
India targets to bring down fiscal deficit to 3.3% of GDP in 2018-19 from 3.5% of GDP a year ago.
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