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Moody’s: Why Moody’s is warning India on fiscal deficit front

Moody’s has warned against the government slipping on the fiscal front and the deficit rising from 3.3% to 3.4%

following the cut in excise duty on fuel. Gene Fang, Associate Managing Director – Sovereign Risk Group, Moody’s Investors, who spoke to Tanvir Gill of ET Now, explains why.

Edited excerpts:

Most on the Street are reading the excise cut on fuel as a one-off. What made you come out with this note citing fiscal slippage fears due to the duty cut?


We have been commenting quite a bit on a lot of developments on the fiscal front of the government and this is in addition to what we have seen previously this year including adjustment of GST, the announcement of minimum support price etc. These all began to add up and our view began to shift around the fiscal deficit. We think the government is probably less likely to hit their targets this year and that prompted us to put out this particular piece.

Isn’t this a bit premature on Moody’s part to say this development could be credit negative?


First of all, this particular policy being credit negative does not necessarily mean the entire reading outlook is changing. I mean we saw the stable outlook on the overall rating but the fiscal targets were one of the primary factors that we have been watching since the upgrade last year. This slippage here right is not that material and it is not necessarily changing our overall view on the outlook, but we do think that this is one of the key factors that we are looking for in terms of what we see as improved effectiveness around managing the budget. Obviously, these slippages are going in the opposite direction to what we would expect.

Are there downside risks to current credit rating and if so, what’s on your watch list?


The number one factor that we are keeping an eye on is the fiscal position. One of the key negative factors for India’s rating is the rather large government debt burden and that is probably the biggest challenge to the overall credit profile. We are watching how that evolves. In addition, we are keenly watching what happens with growth. There are many headwinds on the external front. We are also looking at how domestic credit could tighten and what is happening with the non-bank financial companies in particular. All that could affect the consumption side of the economy from a domestic perspective. That might come in addition to higher oil prices, depreciation on the currency front and other external challenges in terms of the global trade environment getting weaker now.

The NBFC liquidity situation and the RBI holding rates for now.


It is definitely a challenge from the RBI’s perspective. One the one hand, providing some liquidity to the market is important and a lot of NBFCs are funded on very thin liquidity buffers. So, even though they may have sound asset quality fundamentally, a liquidity shock could lead to a broader issue in terms of asset quality and if it affects the entire sector, that will certainly have negative impact in terms of credit available to the economy.

So on the one hand, the RBI has to provide the liquidity but on the other hand we have already talked about some of the other factors on the external side that are creating inflationary pressures from higher oil prices, etc. That is a dilemma for the central bank to sort through and it is certainly one of the policy challenges that we think India is facing in the latter half of the year.

How to connect rupee fall with other EM currencies and build an investment case in emerging markets?


Our perspective is to focus primarily on credit and maybe not so much on the overall risk reward paradigm, but the fundamentals of India do offer some buffers against some of the risks for depreciation. One of the points that we have noted about India’s credit profile is a relatively low reliance on foreign currency debt. From that perspective, the depreciation may not have a direct negative impact on the overall credit profile as you might see in the case of Indonesia that does have a large proportion of foreign currency debt.




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