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Re Slide A Threat To India's Credit Ratings: Moody's

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Credit rating agency, Moody's Investors Service, says rupee depreciation will exacerbate inflationary and fiscal pressures, with both factors potentially constraining the country's sovereign rating.

India's recent measures to prop up the rupee may limit exchange rate volatility to some degree but a sustained reversal in the rupee's would require a significant narrowing of the trade deficit or large capital flows, Moody's adds.

"Given the subdued global growth outlook and price inelasticity of some major imports, depreciation is unlikely to accelerate export growth or curb import growth significantly in the near term," analysts wrote.

Moody's has a "stable" outlook on India's "Baa3" rating, its lowest investment grade-rating.

Speculation that the US Federal Reserve will begin tapering its mega-stimulus programme later this has hurt risky assets widely across Asia. Saddled with a record high current account deficit, the rupee has suffered the most among Asia's emerging market currencies.

Global banks and brokerages have also expressed concern over RBI's moves to stabilise the rupee. Leading banks like Goldman Sachs, BofA-ML and Deutsche Bank are of the opinion that the measures undertaken to protect the currency will likely harm India's growth prospects.

RBI will find it hard to defend the rupee at 60 versus the US dollar, said BofA-ML in its report. "We continue to believe that the RBI will have to recoup foreign exchange reserves - rather than hike rates - to restore confidence in the rupee," says Indranil Sen Gupta, India Economist, DSP Merrill Lynch (India).

On 15 July, the Reserve Bank of India (RBI) raised short-term borrowing costs, restricted funds available to banks and said it would sell Rs 12,000 crore in bonds, effectively draining cash from the market.

The moves raised funding costs for banks and companies almost immediately, creating a ripple effect that could crimp growth in an economy expanding at its slowest in a decade.

"RBI's change in tack in the short term rates might carry some downside risks to growth," said Radhika Rao, economist at DBS in Singapore.

In a further move to attract foreign investment, India on 16 July eased foreign direct investment rules for several industries including telecoms and insurance, in the hope of attracting inflows that could reduce the current account deficit and put momentum in growth.