New Delhi, May 28: Global agency Moody's today said the sliding rupee will not impact India's sovereign ratings, but may hurt private sector companies with large overseas debts.
“Significant Indian rupee depreciation is insignificant for sovereign credit... The direct effect of depreciation on the government's own debt repayment capacity is limited,” Moody's Investors Service said in its report.
The report further pointed out that the current rupee volatility will be “less damaging than in 1991, when low reserves and a widening current account deficit prompted India's last balance of payment crisis”.
The Rupee had dipped to a record low of Rs 56.40 against dollar last week on withdrawal of funds by foreign institutional investors and a widening current account deficit (CAD). The CAD went up to 4 per cent of GDP in December 2011, from 2.6 per cent in March 2011.
The rupee fall, however, was arrested following steps taken by the RBI in the forex market. It was trading at Rs 55.05 against dollar in early trade. Moody's said Indian firms that have large foreign currency repayments scheduled this year would suffer due to rupee depreciation.
India's total private sector external debt is at a “relatively low” 16 per cent of GDP. The depreciation would raise the cost of paying back foreign currency borrowings.
“Individual firms' foreign debt repayment troubles are unlikely to lead to the sort of domestic demand collapse or deleveraging seen in countries with more significant private-sector external leverage,” Moody's said.
The rupee's fall is also a result of India's existing credit weaknesses such as loose fiscal policy, which has boosted domestic demand and increased inflation and import spending, it said, adding domestic regulatory uncertainties have deterred foreign portfolio and direct investment. Moody's has assigned a ‘Baa3/stable' rating for India. The country's foreign exchange reserve stands at USD 290 billion.
Government foreign currency debt comprises only 7 per cent of total government debt and is pegged at 5 per cent of GDP.
Most of it is owed to multilateral and bilateral creditors and has a maturity profile that keeps annual foreign currency repayments relatively low. Therefore, the direct effect of depreciation on the government's own debt repayment capacity is limited, it said.
It added that rupee fall will affect private sector firms without export revenues and with foreign debt obligations.
