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Moody’s says measures announced by Indian govt may not be able to control sliding rupee

The rating agency said that the measures announced by the government will push capital inflows by $8-$10 billion, but it will only partially cover India’s current account deficit

New Delhi: The measures announced by the government to control the downward spiral trajectory that the rupee has been tracing this year and to facilitate more capital inflows may not be enough to reverse the currency’s depreciation, Moody’s Investors Service said on September 24.

“Although these measures provide credit positive support to India’s external account, they are unlikely to reverse the currency’s depreciation,” the global rating agency said.

On September 14, Union Finance Minister Arun Jaitley had announced a slew of measures to bring back foreign flows into India after rupee tanked by 11.8 percent against the dollar in 2018, hitting the all-time low of 72.99 on September 18.

Moody’s said that the measures announced by the government will push capital inflows by $8-$10 billion, which is 0.3-0.4 percent of India’s GDP. But as India’s current account plus net foreign direct investment balance averaged a deficit of about 0.7 percent of GDP in the first two quarters of 2018, foreign capital inflows will only partially cover India’s current account deficit and alleviate only some of the depreciation pressure on the rupee.

The steps are aimed at bringing back foreign flows into India to control the widening current account deficit. The government has reduced the minimum maturity of loans that Indian manufacturing companies can raise from abroad to one year from three years earlier and also exempted withholding tax on the interest earned on Masala bonds issued within 2018-19 (April-March).

Moody’s said that the measures announced by the government will push capital inflows by $8-$10 billion, which is 0.3-0.4 percent of India’s GDP. But as India’s current account plus net foreign direct investment balance averaged a deficit of about 0.7 percent of GDP in the first two quarters of 2018, foreign capital inflows will only partially cover India’s current account deficit and alleviate only some of the depreciation pressure on the rupee. The rating agency said that the measures will take time to affect the capital inflows. It also warned that although the potential removal of hedging requirements could reduce some short-term pressure on the rupee, it could heighten the exposure of companies to currency fluctuations.

At the time of filing this report, rupee was trading at 72.76 a dollar, down from 72.21 on September 21.