 "Weak rupee to stoke inflation, fiscal pressures: Moody's")
Rating agency Moody’s today said depreciation of the rupee would exacerbate inflationary and fiscal pressures in India. The weak rupee will pose additional constraints on the monetary policy response to the current growth slowdown.
The fall in the exchange rate will push the domestic prices of imported goods. It will contribute to inflation and an increase in the government’s expenditures, including on subsidies. It will also raise the cost of servicing foreign currency debt for several firms, Moody’s Investors Services said.
It released a report titled, ‘India: Answers to frequently asked questions about the credit impact of rupee depreciation.’
It feels the extended growth slowdown, continued global financial volatility, and political uncertainty ahead of the 2014 national elections will weigh on the foreign exchange market.
In the two months since the middle of May, the rupee has depreciated against the dollar by 8.3 per cent. According to Bloomberg data, the rupee closed at 59.35 (on July 19) against the dollar, compared to 54.89 on May 17.
On the impact of a weak rupee on foreign debt repayment, Moody’s said the depreciation would not increase the burden significantly. Only six per cent of the government’s total debt is denominated in foreign currency.
The majority of the private sector is less relatively dependent on foreign currency debt (non-government external debt is estimated at 16 per cent of gross domestic product). Hence, the growth impact of depreciation will be more moderate than in a highly externally indebted economy.
The exchange rate reflects the growing interface between domestic and global trends as India’s trade and financial openness grows, noted Moody’s. It said benign global liquidity conditions and high domestic growth supported an approximately 18 per cent appreciation of the rupee against the dollar between 2001 and 2007. International financial volatility contributed to the rupee depreciating by 27 per cent against the dollar over 2007-08.
A combination of global and local factors has underpinned the roughly 17 per cent depreciation against the dollar over two years.
Loose fiscal policy, relatively high domestic inflation and soft global export demand has widened India’s current account deficit over two years, it added.
The fall in the exchange rate will push the domestic prices of imported goods. It will contribute to inflation and an increase in the government’s expenditures, including on subsidies. It will also raise the cost of servicing foreign currency debt for several firms, Moody’s Investors Services said.
It released a report titled, ‘India: Answers to frequently asked questions about the credit impact of rupee depreciation.’
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The steps taken 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 are limited, Moody’s said.
It feels the extended growth slowdown, continued global financial volatility, and political uncertainty ahead of the 2014 national elections will weigh on the foreign exchange market.
In the two months since the middle of May, the rupee has depreciated against the dollar by 8.3 per cent. According to Bloomberg data, the rupee closed at 59.35 (on July 19) against the dollar, compared to 54.89 on May 17.
On the impact of a weak rupee on foreign debt repayment, Moody’s said the depreciation would not increase the burden significantly. Only six per cent of the government’s total debt is denominated in foreign currency.
The majority of the private sector is less relatively dependent on foreign currency debt (non-government external debt is estimated at 16 per cent of gross domestic product). Hence, the growth impact of depreciation will be more moderate than in a highly externally indebted economy.
The exchange rate reflects the growing interface between domestic and global trends as India’s trade and financial openness grows, noted Moody’s. It said benign global liquidity conditions and high domestic growth supported an approximately 18 per cent appreciation of the rupee against the dollar between 2001 and 2007. International financial volatility contributed to the rupee depreciating by 27 per cent against the dollar over 2007-08.
A combination of global and local factors has underpinned the roughly 17 per cent depreciation against the dollar over two years.
Loose fiscal policy, relatively high domestic inflation and soft global export demand has widened India’s current account deficit over two years, it added.