Pressure on rupee not a concern for India's sovereign rating, says S&P

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The recent weakness in the Indian rupee brought about by the global financial and commodity market turmoil is not a concern for the sovereign rating, analysts from S&P Global Ratings have said.
S&P has a BBB- rating on India with a "stable" outlook.

"Higher energy prices are going to have an impact… What we could see is a faster deterioration in the current account position, which is to say we could expect to see a higher current account deficit, especially in the coming fiscal year as long as those energy prices remain high," Andrew Wood, Director-Sovereign & International Public Finance Ratings, at S&P Global Ratings, said on March 10.

"Typically, this sort of trend puts some downward pressure on the rupee but for the sovereign, that's not as concerning as it might be in a variety of other countries primarily because this government does not have very much at all in the way of foreign currency debt. It's all denominated in local currency."

Wood was speaking at an S&P webinar on Asia-Pacific sovereign ratings.

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Rising global crude oil prices and foreign fund outflows sparked by Russia's invasion of Ukraine pushed the rupee to new lows, with the Indian currency going past the 77 to a dollar mark this week.
Wood also sounded optimistic on India's growth prospects. "When we look at India, we see an economy that's actually experiencing a pretty sound and healthy recovery coming out of the pandemic," he said.

S&P expects India's GDP to grow 9.5 percent in FY22 and by an "above trend" 7.8 percent in FY23. These, according to Wood, are among the fastest growth rates for emerging markets "and important to keep in context with regard to India's credit story".

The rapid accumulation of foreign exchange reserves by the Reserve Bank of India should also act as an "additional buffer for the credit rating".

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Concerns about the government's deficit and debt levels, however, remain, and are captured by S&P's rating and outlook on India, Wood said.
Higher fuel prices, however, could weaken India's consumption story. "Higher energy and electricity costs could crimp the buoyancy of private consumption and possibly take the wind out of the sales to some extent in an otherwise strong recovery that we are seeing in India. This could have a knock-on impact on other fiscal channels," Wood said.