Dependence on domestic debt aids rupee slide, says Moody's

Low dependence on foreign currency borrowing will help India in the face of the rupee's depreciation, says Moody's Investors Service.

In the Asia-Pacific region, it says, the rupee "has been worst hit, with a depreciation of over seven per cent, year-to-date, mainly on global developments".  Although India's debt affordability is weak, a feature that distinguishes it from other emerging markets is the predominance of local currency-denominated borrowing in its overall debt profile (96 per cent of the total). This limits fiscal risk to a large extent, the rating agency said. 

The median foreign-currency funding component for Asia-Pacific economies is a little over 30 per cent. India is one of a handful of countries materially below this median, with Malaysia, Korea, Thailand and China.  "For some of these economies, a large domestic funding market acts as a mitigating factor. For instance, Malaysia's deep domestic capital markets provide an anchor for yields." Indonesia and Philippines also saw large depreciation. These pressures reflect a fall in capital flow, primarily driven by global factors like a strengthening dollar and higher oil prices; country-specific factors also played a role, it said.  That said, currency depreciation in the region has been less pronounced in recent months. Also, head of the recent financial market volatility, a favourable macroeconomic backdrop had allowed both Indonesia and India to accumulate sizable reserve buffers; the Philippines, too, Moody's said. 

More generally, financial systems are stronger than at the time of the 'taper tantrum' in 2013, with implementation of macro prudential policies. For instance, hedging requirements in Indonesia and measures to develop onshore foreign exchange markets in Malaysia, the agency said.