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S&P says India's external position "very strong", can absorb some deterioration

High global commodity prices and capital outflows have put pressure on the Indian rupee's exchange rate and depleted the foreign exchange reserves. But the ratings agency does not think the Indian economy has any reason to worry.

August 11, 2022 / 03:09 PM IST
(Image: Reuters)

(Image: Reuters)

The Indian economy can handle some erosion of its foreign exchange reserves as its external position is "very strong", according to S&P Global Ratings.

"India has certainly suffered deterioration in terms of trade over the past six months. That has been a drag on the foreign exchange reserves, which we have seen declining," said Andrew Wood, director of Asia Pacific Sovereign Ratings at S&P Global Ratings, on August 11.

"But we have to keep in mind, and this context is really important, that India has a very strong external balance sheet in our opinion. So some deterioration at the margin, let's say, of that balance sheet for the time being can certainly be absorbed," Wood said at a webinar.

High global commodity prices have resulted in India's merchandise import bill ballooning, with the monthly trade deficit hitting record highs in May, June, and July. Meanwhile, the tightening of global monetary conditions has also seen a reversal of foreign flows, with Indian financial markets seeing a net outflow of nearly $30 billion in the first half of 2022.

On the whole, this has led to the Indian rupee weakening by more than 6 percent so far in 2022, crossing the 80-per-dollar mark for the first time on July 19.

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The Reserve Bank of India (RBI) has deployed its foreign exchange reserves to contain the rapid depreciation of the rupee. The Indian currency's defense has led to the reserves falling by around $70 billion from their peak of $642.45 billion, achieved on September 3, 2021.

Last month, the government and the RBI announced both short and long-term measures to combat the rupee's rapid fall and boost foreign inflows, including settlement of trade transactions in rupees.

The pressure on India's externals, however, hasn't fazed S&P.

"Looking at the overall external position of the Indian economy…we still consider this to be an important credit strength for the rating. Looking at the external obligations of the economy and netting it against the external assets, yes, these trends in terms of the flows have really shifted in the past six months. But, India has built up ample buffers over the years. And while the level of foreign exchange reserves is lower than the immediately prior months, it is still really high historically and very sufficient as well, in our opinion," Wood said today.

Commenting on what would it take for India's external position to be "more meaningfully" undermined, Wood said the current account deficit (CAD) would have to be larger for a longer period of time.

S&P expects India to post a CAD of 2-3 percent of GDP in FY23, with the figure expected to moderate in the subsequent 2-3 years as global commodity prices decline and domestic demand for imports also reduces.

When asked about the risks India faced from the economic weaknesses of its neighbours Sri Lanka and Pakistan, Wood said India's exposure to the two countries was limited and India is unlikely to be significantly impacted in case Sri Lanka faced difficulty in repaying its obligations.
Siddharth Upasani is a Special Correspondent at Moneycontrol. He has been covering the Indian economy, economic data, and monetary and fiscal policies for nine years. He tweets at @SiddharthUbiWan. Contact: siddharth.upasani@nw18.com
first published: Aug 11, 2022 03:09 pm
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