Moody's warns rupee fall may negatively impact India's sovereign rating

MoodysMoody's warns that rupee fall may constrain India's sovereign credit rating.

The Indian rupee fall may constrain country's sovereign credit rating, as it will "exacerbate inflationary and fiscal pressures", even though forex currency denominated debt is only around 6 per cent of total government debt, Moody's warned today.

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It also painted a grim possibility of any major gains in the rupee during the current fiscal, saying that the continuing global volatility, and domestic political uncertainty ahead of the 2014 hustings will limit chances of any significant appreciation apart from further impact growth.

"Foreign currency-denominated debt is only about 6 per cent of the total government debt, so depreciation will not materially increase the sovereign's debt repayment burden.

"However, depreciation will exacerbate inflationary and fiscal pressures, both factors that constrain the country's present Baa3 rating," Moody's said in a note today.

It warned: "The rupee depreciation and its likely impact on inflation and financial stability may thus keep domestic borrowing costs high, and extend the current slowdown."

However, the steep fall will raise the cost of servicing foreign currency government debt though it cannot have any major material impact on debt repayment burden, it added.

Noting that the rupee fell 9.3 per cent between May 15 and July 15, Moody's said the currency fall could increase the debt repayment and input costs for some firms, adding to the current economic stress.

Even though non-government external debt is a relatively modest 16 per cent of GDP and it is not the primary source of financing for the majority of the private sector, the credit impact of depreciation will be greater on specific firms than on the larger economy, it added.

On the future of the rupee, it said: "Though the recent measures, including those to adjust rupee liquidity and increase foreign capital inflows may arrest the pace of depreciation, the subdued growth environment, continuing global volatility, and domestic political uncertainty ahead of the 2014 national elections will limit the chances of significant appreciation this year."

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