India’s external buffers appear sufficient to cushion risks from rapid monetary policy tightening in the US and high global commodity prices, according to Fitch Ratings.
“External finances are becoming less of a strength in India’s credit profile, but we expect foreign-exchange reserves to remain robust and India’s current-account deficit to be contained at a sustainable level”, said the rating agency in a statement on Wednesday.
Fitch, in June 2022, revised the outlook on India’s long-term foreign-currency issuer default rating from “negative” to “stable” and affirmed the IDR at ‘BBB-‘.
The agency said public finances are key to the rating. They are only affected by global developments, as India is relatively insulated from volatility due to its limited reliance on external financing.
India’s foreign reserves fell by almost $101 billion in January-September 2022, but are still large at around $533 billion. The decline has reversed much of the reserve accumulation during Covid-19. The decline reflects valuation effects, a widening current-account deficit, and some intervention by the Reserve Bank of India (RBI) to support the rupee’s exchange rate. The RBI has attributed about two-thirds of the decline to valuation effects.
The agency said foreign exchange cover remains strong for almost months of imports in September. This is higher than during the “taper tantrum” in 2013, when it stood at about 6.5 months, and offers the authorities scope to utilise reserves to smooth periods of external stress.
Large reserves also provide reassurance about debt repayment capacity. Short-term external debt due is equivalent to only about 24 per cent of total reserves.
Gross external debt stood at 18.6 per cent of Gross Domestic Product (GDP) in 2Q22, which is low compared with the median of 72 per cent for ‘BBB’ rated sovereigns in 2021. Sovereign exposures are small, with only about 4 per cent of GDP in primarily multilateral financing. Foreign investor holdings of domestic sovereign debt represent under 2 per cent of the total, reducing risk of spillovers to the wider market should they seek to reduce their exposure.
India’s current-account deficit in the fiscal year ending March 2023 (FY23) is expected to reach 3.4 per cent of GDP, from 1.2 per cent in FY22. Imports have surged on strong domestic demand growth and high oil and coal prices.