2012.05.28 05:32:01 Moody's: Significant India Rupee Depreciation Is Insignificant For Sovereign Credit

SINGAPORE (Dow Jones)--Recent significant depreciation in the Indian rupee isn't a credit negative development for the sovereign, given the limited direct impact on the government's ability to repay its debts, Moody's Investors Service said Monday. An article in the Weekly Credit Outlook noted that only 7% of government debts were denominated in foreign currencies, and most was owed to multilateral and bilateral creditors with a maturity profile that kept annual foreign currency repayments relatively low. "Although depreciation is a credit negative development for Indian firms without export revenues and with foreign currency obligations, the credit effect on the sovereign of these individual firms' credit troubles will be muted," Moody's said. Since the total private sector external debt burden is fairly modest at around 16% of gross domestic product, repayment difficulties of individual firms shouldn't result in a collapse in domestic demand or deleveraging as has been seen in countries with more substantial external private-sector leverage, it added. "Moreover, since official foreign currency reserves are well over 100% of the country's total debt repayment needs over the next 12 months, continued balance of payments volatility will be less damaging than in 1991, when low reserves and a widening current account deficit prompted India's last balance of payments crisis." While depreciation should help to correct the country's economic imbalances, current conditions in the global economy and financial markets will limit any credit positive implications from this correction, the credit ratings firm said. That is because any resultant narrowing of the trade deficit is likely to be based on a slowing in imports and would be accompanied by weaker output growth. Furthermore, a reduced current-account deficit in itself probably won't undo the rupee-weakening trend, it said, noting a strengthened link between equities and currency movements. "A reversal in (rupee) depreciation requires that international investors return to Indian markets, whether prompted by abating global concerns or an improved domestic policy and growth outlook," Moody's said. -By Natasha Brereton-Fukui, Dow Jones Newswires; +65-6415-4044; natasha.brereton-fukui@dowjones.com (END) Dow Jones Newswires May 27, 2012 23:32 ET (03:32 GMT)