RBI restraint on R drop positive for credit outlook, says Moodys

Written by Reuters | Updated: Nov 29 2011, 07:14am hrs
The Reserve Bank of Indias restraint in the face of the rupees 14% decline is positive for the countrys credit outlook, Moodys Investors Service has said. The central bank has limited intervention to periods of extreme volatility, Moodys wrote in its weekly credit outlook.

A greater level of rupee purchases would have depleted foreign-currency reserves while doing little to reverse the rupees depreciation, the credit ratings company wrote.

The rupee has slid the most this half among Asias 10 most- traded currencies, as the countrys current account and budget deficits prompted an asset sell-off amid concern that Europes debt crisis is worsening. Overseas funds sold $697 million more Indian shares than they bought in the first four days of last week, exchange data show.

What the rating agency is saying is that the weakening of the currency is reflective of what is happening in the economy and is a necessary part of the adjustment process, said Olivier Desbarres, Singapore-based head of foreign-exchange strategy for Asia-Pacific ex-Japan at Barclays Capital. If you fight that balancing mechanism, you are always going to be left with large twin deficits and an imbalanced policy.

Indias foreign exchange reserves stood at $309 billion as of November 18, central bank data show, while total external debt was $317 billion at the end of June. The rupee reached a record low of 52.73 a dollar on November 22.

The RBI sold $845 million in the local- currency market in September to protect the rupee, according to data it released this month. It sold a combined $3 billion on November 22 and 23.

The central bank can and will intervene when it is consistent with its policy of ensuring that exchange-rate volatility doesnt impair macroeconomic stability, RBI governor Duvvuri Subbarao said last week. The next day he said that he couldnt confirm if the RBI had intervened.

Apart from selling dollars in the spot market, the RBI also removed a $100 million cap on foreign-currency sales via swaps and raised interest rates on bank deposits for NRIs and companies overseas borrowings. Earlier this month, it allowed foreign funds to buy more rupee debt, raising the limit by 20% to R6,000 crore .

These efforts may marginally raise capital inflows and, thus, keep the rupees value from falling precipitously, Atsi Sheth, a sovereign analyst at Moodys, wrote in the report. A sustained appreciation of the rupee will be difficult if the current-account deficit widens and global risk aversion remains high. Indias current account, the broadest measure of trade, recorded a deficit of $14.1 billion in the three months through June, compared with a shortfall of $5.4 billion the previous quarter, according to central bank data. Moodys predicts this will narrow over the next few quarters as the rupees depreciation makes imports more expensive and exports cheaper.