New Delhi:
Fitch Ratings on Wednesday said India's external buffers are sufficient to mitigate risks associated with a sharp monetary policy tightening in the US and higher global commodity prices, and limit risks to sovereign ratings from external pressures.
It expects the country's foreign exchange reserves to remain strong and the current account deficit (CAD) to remain at a stable level and reach 3.4 per cent of GDP this fiscal, from 1.2 per cent in the previous fiscal.
"India's external buffers appear to be sufficient to mitigate risks associated with bullish monetary policy in the US and higher global commodity prices," Fitch Ratings said. The risk to India's sovereign rating from external pressures is limited.
It said public finance remains the key driver of the rating and India is relatively untouched by global instability due to the sovereign's limited reliance on external financing.
India's foreign reserves fell to around USD 101 billion in January-September 2022, but still stands at around USD 533 billion.
This fall has reversed most of the reserve accumulation that occurred during the pandemic, and reflects valuation effects, a broader CAD, and some intervention by the Reserve Bank of India (RBI) to support the rupee's exchange rate.
"Reserve cover remains strong on imports for about 8.9 months in September. This is higher than the "taper tantrum" in 2013, when it was about 6.5 months, and officials are being asked to use reserves for a smooth period of external stress. provides scope.
"Large reserves also provide assurance about debt repayment capacity. Short-term external debt payable is equivalent to approximately 24 percent of total reserves," Fitch said.
Fitch has the lowest investment grade rating of 'BBB-' in India. In June, it upgraded its rating outlook from 'negative' to 'stable'.
Fitch's comments come close on the heels of US-based agency S&P Global Ratings, which said India is facing a 'cacophony of factors' that could shake its sovereign credit metrics, but with strong economic growth. The growth rate and external balance sheet strength is expected to neutralize the risks. Rooted in a treacherous global environment.
S&P said in a credit FAQ published on October 12 that India's strong economic growth has long been a key counterbalance to its high fiscal deficit and debt burden, and its strong external balance sheet against global market turbulence. Helps as a buffer.
Fitch said in its report that India's gross external debt stood at 18.6 per cent of GDP in the second quarter of 2022, which is lower than the average of 72 per cent for 'BBB' rated sovereigns in 2021.
With about 4 percent of GDP mainly in multilateral financing, sovereign risks are small. Foreign investor holdings of domestic sovereign debt represent less than 2 percent of the total, to reduce the risk of spillover to the broader market if they wish to reduce their exposure.
This fiscal import has increased due to strong domestic demand growth and higher oil and coal prices. Meanwhile, export growth moderated at the faster pace seen in January-June 2022 amid declining prices of steel, iron ore and agricultural products.
“Slowdown in key European and US export markets will impact near-term export prospects. However, we anticipate CAD to shrink to 2 per cent of GDP in FY24, as easing global energy prices will also reduce imports. Our strong medium- term economic growth outlook on India should facilitate deficit financing, especially through FDI.
On the exchange rate, US-based Fitch said it expects Indian officials to continue to use reserves to manage exchange rate volatility.
"Domestic factors are the primary drivers of the RBI's current monetary policy tightening. However, the risk to our current forecast that India's repo rate will hit 6 per cent in 2023-24 is skewed upwards, as a significant change in the rate "There is a possibility of a hike in the US higher than our assumptions, which could put further downward pressure on the rupee and increase imported price inflation," Fitch said.
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