Forex Buffer for India Credit Profile

Rating agency S&P Global on Thursday said higher energy prices will have an impact on India’s CAD; However, the rapid accumulation of foreign exchange reserves by the Reserve Bank of India should also act as an “additional buffer for credit ratings”.

S&P said concerns remain about the government’s deficit and debt levels, but the rupee depreciation may not affect India’s overall debt position as the majority of government debt is in rupee terms. It added that India’s debt-to-GDP ratio is around 90%, which has already been included in the agency’s current sovereign rating of BBB- with a stable outlook.

Rival rating agency Fitch said it was assessing the degree of uncertainty related to the medium-term fiscal and growth prospects for India before finalizing rating action. It pointed out that rising financing costs would be a risk to India’s sovereign rating.

“We have India’s ‘BBB-‘ rating on a negative outlook. The outlook reflects India’s high debt ratio relative to peers and uncertainty about the government’s ability to bring down this ratio in the medium term. Fitch questions “We will continue to assess the degree of uncertainty around the prospects for medium-term financial consolidation and growth prospects before resolving the outlook in either direction,” it said in response to an emailed statement. Because India already has a higher interest burden than peers and this adds to the challenges to the government debt trajectory.”

Moody’s declined to comment on questions sent by Mint.

India’s foreign exchange reserves are currently around $633 billion, rising from $577 billion at the end of March 2021. India’s Chief Economic Adviser V Ananth Nageswaran said in an interview last month that adequate forex reserves provide a good cushion to the country. However, the current geopolitical crisis could drag on demand, and the government could be forced to cut excise duty on the fuel if global crude oil prices remain high. The Economic Survey had forecast oil prices between $70 and $75 a barrel for FY23.

Bank of Baroda chief economist Madan Sabnavis said the debt situation is unlikely to change as the government will cut spending, for example, revenue from disinvestment, does not meet its target.

“Hence, the debt ratio will remain largely constant. The crisis is not leading to any imminent borrowings from the government,” he said. Sabnavis said that India’s sovereign rating is not expected to change as the growth conditions are good. “However, on current account deficit and foreign portfolio investment. There will be concerns. Fronts, forex reserves were good to allay today’s apprehensions. Inflation is a problem everywhere, and therefore, it will not be a pity when looking at India,” he said.

“The higher energy and electricity costs could dampen the private consumption boom and possibly take the wind out of the sails somewhat similar to what we are seeing in India. “This could have implications for other financial channels,” Andrew Wood, director-sovereign and international public finance ratings at S&P Global Ratings, said in a webinar on Thursday.

He also said that while usually this can put some pressure on the rupee, for the sovereign, it is not as related as it could be in many other countries “mainly because this government does not have much foreigners.” Mudra loan. It is all in local currency.”

S&P remains optimistic about India’s GDP outlook, expected to grow 9.5% this fiscal and 7.8% in the “above trend” in FY23. “These are the fastest growth rates for emerging markets … and it’s important to put in context India’s credit story,” Wood said.