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Fitch Ratings sharp sell-off in rupee illustrates India's sensitivity.

Hong Kong: Fitch Ratings said a recent sharp sell-off in the rupee illustrates India's sensitivity to shifts in market sentiment towards emerging markets, and suggests there could be further bouts of pressure as global monetary tightening progresses.

However, the impact of currency weakness on India's sovereign credit profile is likely to be limited by relatively strong external finances, especially the low level of external debt. Currency depreciation could nevertheless add to existing pressures in the corporate and banking sectors.

The rupee has been among the emerging-market currencies affected by pressures from global monetary tightening and, more recently, contagion from the Turkey crisis. It has depreciated by around 9% against the US dollar since the start of 2018, making it the worst-performing major currency in Asia (see chart). Idiosyncratic factors have also contributed, such as the widening of the trade deficit in July 2018 to its largest gap since May 2013. Net portfolio outflows through mid-August have totalled USD5.5 billion for the year, mostly in bonds, compared with inflows of USD27.9 billion over the same period in 2017. Foreign direct investment inflows have also weakened and no longer cover the current account deficit - in other words, India's basic balance has turned negative.However, India's vulnerability to currency risk and capital outflows is unlikely to translate into significant pressure on the sovereign credit profile or pose external financing risks. The current account deficit has widened as global oil prices have risen, but at 1.9% of GDP in 1Q18, up from 1.6% in 2017, was still well below the 5% of GDP recorded around the time of the 2013 Taper Tantrum. We expect the full-year current account deficit to remain below 3.0% of GDP in the fiscal year ending March 2019. Foreign-exchange reserves have declined by USD24 billion since mid-April 2018, but still cover 7.2 months of current account payments, compared with the 'BBB' median of 6.6, providing a buffer should the Reserve Bank of India (RBI) feel it necessary to intervene on a larger scale.

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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:9INDI
Date:Nov 28, 2018
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