New Delhi, Nov 22 – The sharp depreciation of the Indian rupee in mid-2013 highlights India’s difficult transition following an extended period of low growth, high inflation and widening current account deficit.
The currency is currently hovering around Rs62 against a US dollar. It had fallen to an all-time low of 68.85 versus the greenback in August.
Fitch Ratings said the spillover effects of a weaker rupee have not significantly hurt India’s credit worthiness and hence would not trigger any rating action at this point.
The economy has not lost much momentum, with both agriculture and exports remaining resilient and providing a cushion, the rating agency said in a report.
Fitch therefore expects the economy to recover with the real gross domestic product (GDP) forecast to rise to 4.8 per cent and 5.8 per cent in financial year ending March 2014 and financial year 2015, respectively, from a five per cent rise in financial year 2013.
The modest economic recovery, however, will continue to undermine India’s banking sector, which is facing a combination of weakening asset quality, eroding profit and declining capital.
Nonetheless, these factors are likely to have only a moderate effect on the banking sector’s ability to supply credit to the economy, it said.
Inflation has risen only moderately despite higher import prices stemming from the weaker rupee. The Reserve Bank of India has also signalled that it has started to place greater focus on capping Consumer Price Index.
The current account deficit is narrowing following measures to curb gold imports, a weaker exchange rate and softer domestic demand.
Fitch forecasts the current account deficit to decline to 3.1 per cent of the GDP in financial year 2014 versus 4.8 per cent in financial year 2013.
This fall, however, would not be enough to shield India from further pressures related to the eventual start of the Federal Reserve’s tapering, Fitch said.
India’s budget remains under pressure as the central government’s fiscal deficit in the first six months of financial year 2014 stood at 76 per cent of the full-year target.
The authorities have indicated that they are still committed to lowering the fiscal deficit to 4.8 per cent of the GDP against 4.9 per cent in financial year 2013. To achieve this, the central government is likely to clamp down heavily on expenditures in the second half of financial year 2014.
The ability to implement fiscal consolidation and continue with the overall economic adjustment process would support India’s sovereign credit ratings.
Fitch, however, acknowledged that the authorities’ resolve to implement both tighter fiscal and monetary policies may be tested as the general election, which must be held by May 2014, approaches.
– Bernama
