Moody's Investors Service has stated that most rated companies in India have the financial buffers necessary to withstand a further 10-15 per cent depreciation of the rupee. The Indian currency has already depreciated by 4.5 per cent since the beginning of the year, impacted by rising commodity prices and capital outflows from developed economies.
Moody's, in a statement, highlighted that higher energy prices and interest rates have caused capital outflows and put pressure on the rupee. The credit rating agency noted that these external factors would increase credit risks associated with currency volatility. Despite this, most rated companies in India have protections in place to limit the adverse effects of currency fluctuations. These include natural hedges in the form of revenue and costs denominated in or linked to the US dollar, some US dollar revenue and financial hedges, or a combination of these factors.
Exporters could benefit from the depreciation of the rupee, as their services or products become cheaper and, therefore, more competitive in the global market. However, Moody's added that in the current macroeconomic environment, the benefits would likely be limited amid weak global demand and rising inflation.
The rupee's depreciation is credit negative for companies that generate revenue in rupees but rely heavily on US dollar debt to fund operations, as well as for those with significant dollar-based costs, such as raw materials and capital spending. Nonetheless, the negative credit implications for rated companies will be limited.
The statement by Moody's comes as the rupee fell by 8 paise to close at 77.76 against the US dollar on Thursday. The currency was weighed down by elevated crude oil prices and persistent foreign capital outflows. Moody's assessment of the resilience of Indian companies to further rupee depreciation is a positive sign in the face of ongoing macroeconomic headwinds.