Wednesday 27 / November / 2024
Hong Kong: India's external buffers appear sufficient to cushion risks associated with rapid monetary policy tightening in the US and high global commodity prices, says Fitch Ratings.
External finances are becoming less of strength in India's credit profile, but according to Fitch Ratings, it expected foreign exchange reserves to remain robust and India's current account deficit (CAD) to be contained at a sustainable level. Moreover, public finances remain the key driver of the rating and are only modestly affected by these developments, particularly as India is relatively insulated from global volatility due to the sovereign's limited reliance on external financing, the rating agency said. India's foreign reserves fell by almost USD 101 billion in January-September 2022, but are still large at around USD 533 billion, the agency said.
It said the decline had reversed much of the reserve accumulation that occurred during the Covid-19 pandemic, and reflected valuation effects, a widening current-account deficit, and some intervention by the Reserve Bank of India (RBI) to support the Indian rupee's exchange rate. Fitch said the central bank has attributed about two-thirds of the decline to valuation effects.
Reserve cover remains strong at about 8.9 months of imports in September, the rating agency said, adding that this was higher than during the "taper tantrum" in 2013, when it stood at about 6.5 months. It also said it offers the authorities scope to utilise reserves to smooth periods of external stress. Large reserves also provide reassurance about debt repayment capacity, Fitch said, adding that the short-term external debt due is equivalent to only about 24 per cent of total reserves.
Gross external debt stood at 18.6 per cent of GDP in the second quarter of the financial year 2021-2022 (Q2FY22), which is low compared with the median of 72 per cent for 'BBB' rated sovereigns in 2021.
The rating agency said sovereign exposures are small, with only about 4 per cent of GDP in primarily multilateral financing. It said foreign investor holdings of domestic sovereign debt represent under 2 per cent of the total, reducing risk of spillovers to the wider market should they seek to reduce their exposure.
The rating agency said it forecast India's CAD in the fiscal year ending March 2023 (FY23) will reach 3.4 per cent of GDP, from 1.2 per cent in FY22. Imports have surged on strong domestic demand growth and high oil and coal prices. Meanwhile, export growth has moderated from the fast pace seen in January-June 2022, amid declines in prices for steel, iron ore and agricultural products, it added.
The agency said recessions in key European and US export markets would weigh on near-term export prospects. However, it forecast that the CAD to narrow in FY24, to 2 per cent of GDP, as easing global energy prices will also dampen imports. The country's robust medium-term economic growth outlook on India should facilitate financing of the deficit, particularly from FDI.
