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Badly Performing Rupee (USD/INR) Could Cost India Credit Rating

Published: 18 Jul at 5 PM Tags: Dollar, America, USA, India,

According to Moody’s Investor Service, one of the top three credit ratings agencies, the Rupee’s persistent weakness could constrain India’s sovereign credit rating.

Since Federal Reserve Chairman Ben Bernanke announced that the US central bank may begin tapering stimulus if the world’s largest economy continues to recover, emerging market currencies have been badly hit.

India’s Rupee has been one of the worst affected, hitting record lows against the US Dollar despite the Reserve Bank of India’s best efforts to restrain the currency’s volatility.

Today the RBI sold off around 2 billion Dollars worth of government bonds in an attempt to support the Rupee, but if the currency continues to soften India’s Baa3 credit rating could be at risk.

Although the Baa3 rating is the lowest investment-grade rating offered by Moody’s, India has a ‘stable’ outlook – for now at least.

Moody’s asserted today that ‘India’s recent measures to prop up the Rupee may limit exchange rate volatility to some degree but a sustained reversal in the Rupee would require a significant narrowing of the trade deficit or large capital flows. Given the subdued global outlook and price inelasticity of some major imports, depreciation is unlikely to accelerate export growth or curb import growth significantly in the near term.’

The ratings agency is concerned that if the Rupee’s depreciation continues the fiscal and inflationary pressures India is already dealing with will be exacerbated.

Although the Rupee continues to trade just below 60 per Dollar, the currency did weaken slightly against its American counterpart today as the ‘Greenback’ was lifted by a lower-than-forecast increase in US initial jobless claims.

Following the release of the US employment figures currency strategist Adam Cole observed: ‘The dollar is generally very well bid. The market expectation that the tapering announcement will come in September still looks sensible and nothing Bernanke said yesterday changed that.’

The USD/INR exchange rate is currently trading in the region of 59.6000 Rupee per Dollar.
As of Thursday, 18th July 2013, the Pound Sterling currency rates mentioned within this news item were as follows:

GBP USD exchange rate was 1.5221, and GBP INR exchange rate was 90.4534.
Patrick James About Author: (289 Posts)Patrick completed his economics degree just as the global financial crisis struck in 2008. In the intervening years Patrick has made his mark, climbing to a prominent position within a large financial services provider. As part of his role Patrick uses his expertise to advise companies of the best ways to safeguard against currency risk.

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