Weak Re not always negative, says Moody's

Factors driving volatility have to be addressed

 The rupee’s weakening is not always negative and it only means the currency is getting adjusted to the current conditions, said Atsi Sheth, senior vice president (sovereign risk group), Moody's Investor Services.

She told Deccan Herald here on Wednesday that the rupee’s weakening is considered a slap on the face of the economy, but it is not so.

“Currencies fluctuate according to market conditions and fundamentals. And, defending a particular exchange rate tends to mean that either you are not respecting fundamentals or not respecting market conditions. From a sovereign credit perspective, currency volatility per se is something that should not be addressed by defending a currency but by addressing the factors driving the volatility,” Sheth added.

She said rather than defending the Rupee at 62 or 63, the government could find out whether it is the current account that is widening, or a high inflation that is driving the volatility and address those issues. “Using your reserves to buy Rupees when the reserves go down, that doesn’t solve the problem. Addressing inflation and the current account does.”

“Second, if you were a country with a very high foreign currency debt, then exchange rate depreciation would be negative, as the debt burden will rise. India doesn’t have a very high foreign currency debt, whether it is at the government or corporate levels.”

On Moody’s India current Baa3 rating, she said while the growth is faster than the world average, the inflation rate has been higher than the global average and its current account deficit has been volatile, affecting capital flows and the exchange rate.

For an upgrade, she said they would be looking at the extent to which the government removes the supply side constraints on competitiveness and allow the output to compete with the rest of the world, helping exports and imports. It will lower inflation because the cost of each additional output will be lower, she said.

Sheth estimated an upgrade in the next 12-18 months. On the possible outlook risks, she said if the government chooses to use fiscal expenditure for compensation over structural reforms, in case of drought for instance, they would consider it a negative step.


Rupee surges  35 paise

Extending gains for the second straight day, the rupee on Wednesday surged by 35 paise to 63.65 on persistent selling of dollars by banks and exporters on weakness of the dollar in overseas market.

Banks and exporters preferred to reduce their dollar position in view of lower greenback demand in overseas markets.

The unit continued to weaken in the global market, sending a benchmark dollar index to the lowest level since late January as recent US data prompt investors to rethink the timing of the first Federal Reserve rate hike.

Moody’s Gyaan

Currencies fluctuate according to market conditions and fundamentals
Defending an exchange rate means you are not respecting fundamentals and the market

Currency depreciation is negative for countries with high foreign currency debt
India doesn’t have very high foreign currency debt