A U.S. one-hundred dollar banknote and Indian ten rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

India’s Sovereign Rating Among Least Vulnerable To Currency Pressures: Moody’s

Turbulence in the currency markets, which has led to the rupee weakening to all-time lows, will have little impact on India’s sovereign ratings. This is because of limited foreign currency borrowings by the government of India, global ratings agency Moody’s Investors Service said in a report today.

“India is among the least vulnerable to tightening external financing conditions because of their low reliance on external capital inflows,” Moody’s said. That puts India in the same bracket with Brazil, China, Mexico and Russia that Moody’s considers as being relatively immune to currency pressures.

The rupee fell to a lifetime low of 69.09 against the U.S. dollar earlier today and has depreciated close to 8 percent so far this year. The previous all-time intraday low for the currency was 68.86 against the greenback on Nov. 24, 2016. The weakness in the Indian currency follows a stronger dollar, higher oil prices, wider current account deficit and foreign portfolio outflows.

However, India’s strength lies in a “large and relatively stable” domestic financing base for paring government debt, said Moody’s. This, in turn, shields the economy from abrupt changes in external financing conditions.

India’s low dependence on foreign-currency borrowing to fund its debt burden limits the risk of currency depreciation transmitting into materially weaker debt affordability.
Moody’s Investors Service

Moody’s noted that sovereign ratings of economies with large current account deficits, high external debt repayments and substantial foreign-currency government debt are most exposed to dollar strengthen. On those grounds, Argentina, Turkey and Sri Lanka are among the most exposed economies.

In the Indian context, the current account deficit came under pressure due to surging crude oil, but remains modest relative to GDP, according to Moody’s. Also the deficit being largely financed by equity inflows and foreign direct investment serves as an added advantage. The current account deficit is expected to widen to 2.5 percent of the GDP by March, 2019.

Argentina, Turkey and Sri Lanka are among the most exposed economies to dollar strengthening based on large current account deficits, high external debt repayments and substantial foreign-currency government debt.
India’s significant build up of foreign exchange reserves in the recent years to all-time highs provides a support buffer to help mitigate external vulnerability risk.
Moody’s Investors Service

Moody’s Vice President Chirstian De Guzman spoke to BloombergQuint on its latest report.

Watch the full interaction here:

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