ET BureauSovereign ratings agency Moody’s does not see the rupee plunge affecting India’s sovereign debt payment capacity due its relative less foreign currency borrowing. In an email interview with ET, Atsi Sheth, vice-president -sovereign risk group, Moody's Investors Service, says the Food Security Bill will have an impact on government finances. Edited excerpts:
Would the Food Security Bill impact the country’s finances?
It will add to the government’s expenditures on food subsidies. However, given the likely timing of implementation, its full impact will not be felt in the financial year 2013-14 fiscal deficit but in the deficits in future years.
Will it affect India’s rating?
Although the law has just been passed in the Lok Sabha, it has been on the policy agenda for a long time. Thus, we have taken it into consideration in the credit analysis. We believe that the Bill will have an impact on government finances as well as the country’s macroeconomic balance, and we will continue to monitor whether this rise in expenditures is compensated with measures to increase revenues or cuts in other expenditures.
Do you see a change in fundamentals of the country?
From the perspective of the sovereign credit profile, the credit challenges remain the same. These include a high fiscal deficit and supply side constraints related to infrastructure and policy uncertainties, all of which have characterised India’s credit profile for a long time.
While the current combination of slowing growth, high inflation and a rising current account deficit reflects these long-standing challenges, the catalyst for the steep depreciation of the rupee are international expectations of a less benign global liquidity and interest rate environment, which have lowered the availability of capital inflows to fund the CAD.
How do you see rupee depreciation playing out in terms of ratings?
Given the relatively low level of foreign currency debt owed by the Sovereign, depreciation doesn’t affect Sovereign debt repayment capacity significantly, although it does increase fuel subsidy costs and inflationary pressures.
Would the Food Security Bill impact the country’s finances?
It will add to the government’s expenditures on food subsidies. However, given the likely timing of implementation, its full impact will not be felt in the financial year 2013-14 fiscal deficit but in the deficits in future years.
Will it affect India’s rating?
Although the law has just been passed in the Lok Sabha, it has been on the policy agenda for a long time. Thus, we have taken it into consideration in the credit analysis. We believe that the Bill will have an impact on government finances as well as the country’s macroeconomic balance, and we will continue to monitor whether this rise in expenditures is compensated with measures to increase revenues or cuts in other expenditures.
Do you see a change in fundamentals of the country?
From the perspective of the sovereign credit profile, the credit challenges remain the same. These include a high fiscal deficit and supply side constraints related to infrastructure and policy uncertainties, all of which have characterised India’s credit profile for a long time.
While the current combination of slowing growth, high inflation and a rising current account deficit reflects these long-standing challenges, the catalyst for the steep depreciation of the rupee are international expectations of a less benign global liquidity and interest rate environment, which have lowered the availability of capital inflows to fund the CAD.
How do you see rupee depreciation playing out in terms of ratings?
Given the relatively low level of foreign currency debt owed by the Sovereign, depreciation doesn’t affect Sovereign debt repayment capacity significantly, although it does increase fuel subsidy costs and inflationary pressures.
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