Impact of currency weakness on India’s sovereign credit profile likely to be limited: Fitch

20 Aug 2018 Evaluate

Amid depreciation in Indian rupee, global ratings agency, Fitch Ratings in its latest report has said that the impact of currency weakness on India’s sovereign credit profile is likely to be limited on the back of relatively strong external finances, especially the low level of external debt. It also said currency depreciation could nevertheless add to existing pressures in the corporate and banking sectors. It noted that a recent sharp sell-off in the rupee illustrates the country’s sensitivity to shifts in market sentiment towards emerging markets, and suggests there could be further bouts of pressure as global monetary tightening progresses.

The report showed that rupee depreciated by around 9% against the US dollar since the start of 2018, making it the worst-performing major currency in Asia. Idiosyncratic factors have also contributed, such as the widening of the trade deficit in July 2018 to its largest gap since May 2013. Net portfolio outflows through mid-August have totalled $5.5 billion for the year, mostly in bonds, compared with inflows of $27.9 billion over the same period in 2017. Foreign direct investment inflows have also weakened and no longer cover the current account deficit - in other words, India’s basic balance has turned negative.

However, the report stated that India’s vulnerability to currency risk and capital outflows is unlikely to translate into significant pressure on the sovereign credit profile or pose external financing risks. The current account deficit (CAD) has widened as global oil prices have risen, but at 1.9% of GDP in 1Q18, up from 1.6% in 2017, was still well below the 5% of GDP recorded around the time of the 2013 Taper Tantrum. The rating agency said it expects the full-year CAD to remain below 3.0% of GDP in the fiscal year ending March 2019.

Fitch Ratings further said India also has relatively low foreign-currency debt. Only around 7% of government debt is denominated in foreign currency (BBB median: 38%), while total foreign-currency external debt, including the private sector, is equivalent to just 13% of GDP, which is one of the lowest among major emerging markets. Meanwhile, the risk of currency pressures triggering a sudden spike in domestic borrowing costs is mitigated by the RBI’s relatively narrow focus on its inflation objective, as opposed to countering external pressures.

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