MUMBAI: The Indian government's decision to boost capital inflows in an attempt to curtail rupee slide might not work. Thats what rating agency Moody's said in its research note on Monday as it believes that the government's recently announced measures to maintain its fiscal deficit target are unlikely to reverse the rupee slide, and perhaps might even slow down the currency further.
The Indian rupee has fallen more than 10 per cent against the US dollar since January 2018 and was at INR72.1 against the dollar as of 21 September. Indias current-account deficit too has widened to 2.4 per cent of GDP in the first quarter of fiscal 2019 from 1.9 per cent the previous quarter, driven by higher oil and non-oil imports. To address this the government earlier this month announced a range of measures some of them include to make it less expensive for Indian companies to borrow abroad and incentivise foreign investment in Indian bond markets.
Moody's picks the finance ministry's move to exempt investors from withholding tax for offshore rupee denominated (masala) bonds issued in the year 2019. The other interventions include, removal of single exposure limit of 20 per cent on foreign portfolio investors for corporate bonds. On the borrowing side, the government announced this month that it has lowered the minimum maturity of external commercial borrowings of upto $50 million to one year from three years.
However the rating agency is of the view that these measures will likely take time to affect capital inflows, and even though the potential removal of hedging requirements could reduce some short-term pressure on the rupee, it could also heighten corporates' exposure to currency fluctuations.
However Moody's thinks that India's macroeconomic fundamentals still outweigh the risks as the current CAD is still narrower than the near 5 per cent of the GDP that India witnessed during 2013, where even the currency depreciated by almost 20 per cent. But the subsidies on Liquefied petroleum gas and kerosene will raise expenditures and add to existing pressures on India's fiscal position- some of them include lowering of goods and services tax rates on a range of consumer goods and a tax cut for small businesses, as well as the relatively high minimum support prices set for this year.
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