Falling rupee credit negative for India Inc, impact to be limited: Moody's

Impact of the rupee's weakening will be diverse and will also depend on issues such as a particular company's reliance on exports, its cost base, and its exposure to pricing on international markets

Global rating agency Moody's Investors Service on Monday said that a sustained weakening of the rupee would be credit negative for its rated Indian companies.

It will have an adverse impact particularly on those entities that generate revenue in rupees but rely on US dollar debt to fund their operations and have significant dollar-based costs, including capital expenses.

"The Indian rupee hit a new low of Rs 72.1 to the US dollar on Thursday and has now weakened around 13 per cent since the beginning of 2018," said Annalisa DiChiara, Moody's vice-president and a senior credit officer, in a statement.

"Nevertheless, most rated Indian-based corporates have protections in place -- including natural hedges, some US dollar revenues and financial hedges -- to limit the negative credit implications of a potential further 10 per cent weakening of the rupee to the US dollar from Thursday's rate," says DiChiara.

Moody’s assessment is based on a review of 24 Indian corporates including those in the IT, oil and gas, chemicals, automobiles, commodities, steel, and real estate development sectors. These are under its rating watch.

"Furthermore, the impact of the rupee's weakening will be diverse and will also depend on issues such as a particular corporate's reliance on exports, its cost base, and its exposure to pricing on international markets," Moody’s said.

Moody's comments follow its annual survey of the US dollar debt exposures of South and Southeast Asian high-yield companies which considered the effects of a weakening of the rupee to around Rs 78 to the US dollar.

Weaker credit metrics -- under a scenario of a further 10 per cent drop in the value of the rupee from the rate on September 6-- can be accommodated in the companies' current rating levels, according to the Moody's report.

Furthermore, refinancing risk associated with the companies' US dollar debt maturing over the next 12 months is manageable.

Of the 24 Moody's rated Indian-based corporates, 12 generate most of their revenue in US dollars or have contracts priced in US dollars, providing a natural hedge. This limits the effect a weakening in the rupee could have on their cash flows.

The cost base for these companies -- which includes those in IT -- is also largely rupee denominated, meaning they could see some cash flow benefit from currency mismatches. However, weak industry fundamentals, including rising competition, pricing pressure and increasing employment costs would mute any overall benefit for most.

Seven rated oil and gas companies also fall under the "naturally hedged" category. Although they rely on foreign-currency debt, their earnings are linked to the US dollar because crude oil, natural gas, petroleum products and petrochemicals are all sold at US dollar-linked prices in India. This provides a natural hedge to their US dollar-denominated borrowings, it added.