New Delhi: The risk to India’s sovereign rating from external pressures is limited, said Fitch Ratings.
In its latest report, Fitch Ratings said India’s external buffers appear sufficient to cushion risks associated with the rapid monetary policy tightening in the US and high global commodity prices.
“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,” Fitch Ratings said.
According to the credit rating agency, public finances is the key driver of the rating and are only modestly affected by these developments, particularly as India is relatively insulated from global volatility due to the sovereign’s 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 that occurred during the Covid-19 pandemic, and reflects valuation effects, a widening current-account deficit, and some intervention by the Reserve Bank of India (RBI) to support the Indian rupee’s exchange rate. The RBI has attributed about two-thirds of the decline to valuation effects.
According to Fitch Ratings, India’s forex reserve cover remains strong at about 8.9 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,” Fitch Ratings said.
Foreign investor holdings of domestic sovereign debt represent under two per cent of the total, reducing risk of spillovers to the wider market should they seek to reduce their exposure, Fitch Ratings said.
