Won't downgrade India; Re fall not hurting growth: Moody's

JPMorgan earlier today downgraded India shares to 'neutral' from 'overweight'. But its global peer Moody's Investors Service does not see a case for a rating downgrade. Atsi Seth, Moody's Investors Service, says the Indian government itself has very low level of foreign currency debt and hence its debt repayment capacity has not dramatically changed because of rupee depreciation.

Also Read: Downgrade based on rupee fall: JPMorgan
She further adds, the BAA3 rating itself is constrained by wide fiscal deficit, and India is still import dependent in terms of its fuel needs and the recurrent inflationary pressure, all of which are reflected on the rupee level right now.
She says these issues had constrained Moody's India rating even when growth was at 7-8 percent last year. The reason it has come to play now is because external environment for growth has become less benign.
Seth told CNBC-TV18, when comparing India to its rating peers, its growth rate even at these levels compels reasonably well to its rating peers at 5 percent. Its savings rate is also much higher. The country’s fiscal deficit has always been a problem and so has inflation.
She feels investment levels are curtailing growth more than the falling rupee. Though some push could come from global revival and the good sowing season too may aid growth. Below is the verbatim transcript of Atsi Seth's interview on CNBC-TV18 Q: We have seen this steady rupee decline as well as rise in yields. Are you going to revise your growth forecast in the light of both these?
A: The rupee I think will not have a dramatic impact on near term growth. Of course it does raise input cost, it has kept the monetary policy rates higher than what otherwise would have been. But really what is curtailing growth at this point is investment levels and the uncertainty that accompanies any pre-election year in India is certainly evident now. So I don't know if there is much that can be expected in terms of a growth revival in the next three-four quarters until the election cycle really runs itself out.
I think some push could come from global growth revival which we are seeing in certain quarters, we are seeing US data being a little better than before, we are seeing in some sections of Europe there is a little bit more buoyancy in terms of growth and that is going to have some more effect on industrial output which is quite linked to exports. So that could be one area where growth comes in.
Third area where growth could come in is agriculture, sowing seems to have gone well, forecast is that crop output will be good which will not only add to supply but also in terms of rural demand and that could be a small revival. But really we think the 5 percent growth rate might be the best one can hope for this year. Q: Would you revise your India rating given the strain on the fisc?
A: One thing I would like to highlight is that the BAA3 rating itself - if you read our research over the last several years we have said that rating is constrained by wide fiscal deficit. The fact that India still in terms of its fuel needs is import dependent and the current inflation pressure all of which we are seeing reflected in the rupee level right now. These have constrained the rating even when growth was between 7-10 percent over the last year because we felt that until the longer term challenges were addressed, at some point these challenges would reflect themselves in the growth matrix or the current account matrix and the rupee itself.
And we are seeing all of this come to play now. The reason it has come to play of course is because the growth external environment has become less benign but the fact is that these fundamental challenges were in existence when growth was 7-10 percent and they are in existence now. So our rating has always been constrained, it wasn’t higher when growth was higher for this reason.
The other thing is the rating is global, our perspective is global and we have to weigh India's current challenges against its peers. Both the positives and negatives, the fiscal deficit has always been a negative so has inflation, but India's growth rate even at these levels compels reasonably well to its rating peers at 5 percent. There are several countries with the same rating levels that have much lower growth rates. Its saving rate is much higher. That has also to be taken into account.
Specifically to do with depreciation the sovereign itself has a very low level of foreign currency debt. So India's sovereign debt repayment capacity which is the crucial aspect of the rating has not dramatically changed because of depreciation.