“Relatively strong external finances, especially the low level of external debt” also support India’s credit profile.
The weakening in the rupee is likely to have a limited impact on India’s sovereign credit profile, ratings agency Fitch said in a report.
Although India’s foreign reserves have dipped by $24 billion since mid-April 2018, the country still has reserves to cover 7.2 months of current account payments if Reserve Bank of India (RBI) felt the need to intervene on a larger scale.
"Relatively strong external finances, especially the low level of external debt," also support India’s credit profile. The agency cautioned that the weakening of the rupee will put pressure on banking and corporate sectors.
"Domestic-currency lending to corporates with unhedged foreign-currency borrowings could face increased repayment risk. Moreover, Indian banks are already struggling with asset-quality problems and have thin loss-absorption buffers to cope with further stress," Fitch said.
A widening of the current account deficit as global oil prices have risen to 1.9 percent of GDP in Q1 FY 19, up from 1.6 percent in 2017. This figure was still "well below the 5 percent of GDP recorded around the time of the 2013 Taper Tantrum". Fitch expected the full-year current account deficit to remain below 3 percent by the end of FY19.
Companies that rely heavily on imports as inputs, operate with significant foreign-currency debt and generate revenue denominated in local currency are susceptible to the effects of a weakening rupee. The report flagged airline, telecom, auto, chemical and fertiliser sectors as being the most vulnerable.The effects of the falling Turkish lira, the recent pressures from global monetary tightening, a net portfolio outflow in August, widening of the trade deficit in July 2018 and lower foreign direct investment inflows have contributed to the weakening of the currency.