Forex  buffer  for  India  credit  profile

Rating agency S&P Global on Thursday said high energy prices would have an impact on India’s CAD; however, faster accumulation of forex reserves by the Reserve Bank of India should also act as an “additional buffer for the credit rating”.

S&P added that while concerns surrounding the government’s deficit and debt levels remain, the depreciating rupee may not impact India’s overall debt position as much of the government debt is denominated in rupees. India’s debt to GDP ratio at about 90% has already been factored into the agency’s existing sovereign rating of BBB- with a stable outlook, it said.

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

“We have India’s ‘BBB-’ rating on Negative outlook. The outlook reflects India’s high debt ratio relative to peers and uncertainty around the government’s ability to bring down this ratio over the medium term. We will continue to assess the degree of uncertainty around the prospects for medium-term fiscal consolidation and growth prospects before resolving the outlook in either direction,” Fitch said in an emailed response to queries. “Rising financing costs would present risks to the rating as India already has a high-interest burden compared to peers and adds to challenges for the government debt trajectory,” it added.

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

India’s forex reserves currently stand at around $633 billion, rising from $577 billion at the end of March 2021. India’s chief economic adviser V. Anantha Nageswaran, said in an interview last month that ample forex reserves provide the country with a good cushion. However, the current geopolitical crisis could drag demand, and the government may be forced to cut excise duty on fuel if global crude prices continue to stay high. The Economic Survey had estimated oil prices between $70 and $75 per barrel for FY23.

Madan Sabnavis, the chief economist of Bank of Baroda, said the debt situation is unlikely to change since the government will cut expenditure if revenues, for instance, from disinvestments, does not meet its target.

“Therefore, debt ratios will be largely stable. The crisis is not leading to any imminent borrowing from the government,” he said. Sabnavis added that India’s sovereign rating is not expected to change either as growth conditions are good. “While there will be concerns on the current account deficit and foreign portfolio investment fronts, forex reserves were good to address fears as of today. Inflation is a problem all over, and hence, will not be a sore point when viewing India,” he added.

“Higher energy and electricity costs could crimp buoyancy of private consumption and possibly take the wind out of the sails to some extent in an otherwise strong recovery that we are seeing in India. This could have a knock-on impact on other fiscal channels,” said Andrew Wood, director-sovereign and international public finance ratings, at S&P Global Ratings, in a webinar on Thursday.

He also said that while typically this may put some downward pressure on the rupee, for the sovereign, that’s not as concerning as it might be in a variety of other countries “primarily because this government does not have very much at all in the way of foreign currency debt. It’s all denominated in local currency.”

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