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Global Credit Research - 19 Jul 2013
New York, July 19, 2013 -- Moody's Investors Service says that the depreciation of the rupee
will exacerbate inflationary and fiscal pressures in India (Baa3 stable)
and pose additional constraints on the monetary policy response to the
current growth slowdown.
Moody's just released report titled, "India: Answers
to Frequently Asked Questions About the Credit Impact of Rupee Depreciation"
notes that the fall in the exchange rate, by increasing the domestic
prices of imported goods, will contribute to inflation as well as
to an increase in the government's expenditures, including
on subsidies. It will also raise the cost of servicing foreign
currency debt for several firms.
However, it will not increase the government's own debt repayment
burden significantly because only 6% of the government's
total debt is denominated in foreign currency. Also, given
the relatively low reliance on foreign currency debt by the majority of
the private sector (non-government external debt is estimated at
16% of GDP), the growth impact of depreciation will be more
moderate than in a highly externally indebted economy.
The report points out that steep rupee depreciation is not unprecedented
and that the exchange rate reflects the growing interface between domestic
and global trends as India's trade and financial openness increases.
Benign global liquidity conditions and high domestic growth supported
an approximately 18% appreciation of the INR against the USD between
2001 and 2007. Then, international financial volatility contributed
to the INR depreciating by 27% against the USD over the course
A combination of global and local factors has underpinned the roughly
17% INR depreciation against the USD over the last two years.
Loose fiscal policy, relatively high domestic inflation and soft
global export demand has widened India's current account deficit
over the last two years. Meanwhile, international financial
uncertainty and India's own subdued growth outlook has lowered capital
inflows over the same period. The steep decline in the currency's
value over the last two months coincided with heightened international
risk aversion stemming from the anticipated tapering of US Federal Reserve
Moody's expects that measures undertaken in recent weeks,
including those to adjust rupee liquidity and increase foreign capital
inflows, could arrest the pace of depreciation. However,
the chances of significant near term appreciation this year are limited
given the extended growth slowdown, continued global financial volatility,
and domestic political uncertainty ahead of 2014 national elections.
Subscribers can access the report at http://www.moodys.com/research/India-Answers-to-Frequently-Asked-Questions-About-the-Credit-Impact-Credit-Focus--PBC_155863.
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VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
MD - Sovereign Risk
Sovereign Risk Group
Moody's: Weak rupee to stoke India's inflation, fiscal pressures
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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