Global credit ratings, research and risk analysis firm Moody‘s Investors Service said higher oil prices and interest rates might put pressure on India’s fiscal and the current account deficit.
However, the firm in a report pointed out that country’s growth prospects remain in line with the economy’s potential of around 7.5 percent this year and the next.
“This robust growth, large foreign exchange reserves, a predominantly domestic funding base, strengthened monetary policy management and macro-prudential regulations on bank lending in foreign currency will broadly contain the credit impact of the higher oil prices and rising interest rates,” Moody’s Vice President and Senior Analyst Joy Rankothge said in a statement.
According to the Moody’s report, oil prices at current levels will raise expenditures and add to existing pressures on the fiscal position.
“While the government may cut back on capital expenditures to limit fiscal slippage, as has happened in previous years, such cuts may not fully offset the revenue losses and higher spending on energy subsidies and price support for crops,” the statement said.
“Moody’s, therefore, sees risks that the Central government deficit will be wider than targeted in the short term. However, a temporary fiscal slippage, if any, will not offset India’s robust nominal GDP growth and large domestic financing base which helps keep the government’s debt burden broadly stable.”
On the current account, the report said higher oil prices will contribute to a wider deficit, but the gap will remain significantly narrower than five years ago.
The report noted that economy-wide external debt is limited and the country’s foreign exchange reserve buffers are ample. Overall, Moody’s continues to assess India’s external vulnerability risk as low.
“The country’s low dependence on foreign currency debt and long average debt maturity will contain the impact of rising rates and currency depreciation,” the statement said.
“India’s average government debt maturity is around 10 years and the government almost entirely relies on local currency-denominated financing, helping stabilize debt affordability.”
As per the report, regulatory restrictions on foreign currency borrowings limit exchange rate risks for the banks.
“The regulated nature of foreign currency transactions for both banks and corporates will limit the direct impact of exchange rate volatility on their operations,” the statement added.