Weaker rupee is negative for Indian corporate, but effects limited by natural hedge, says Moody's

Last Updated: Mon, Sep 10, 2018 14:32 hrs
INR USD Exchange

Moody's investor services on Monday said that the Rupee's weakening is credit negative for Indian companies that generate revenue in rupees but rely on US dollar debt to fund their operations.

Although corporate may have internal financial controls such as hedging that helps control their margins, a senior Moody's credit officer was reported as saying that there could be a natural hedge to many Indian companies.

"Nevertheless, most rated India-based corporate 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 percent weakening of the rupee to the US dollar from Thursday's (6th Sept) rate (of 72.11 to a dollar)," Moody's VP and Senior credit officer Annalisa DiChiara was quoted explaining in a news report.

Of the 24 Moody's-rated India-based corporate across the high-yield and investment-grade categories, 12 generate most of their revenue in US dollars or have contracts priced in US dollars, providing a natural hedge, and thus limiting the effect a weakening in the rupee could have on their cash flows, Moody's said.

These 24 corporate includes clients in IT, oil and gas, chemicals, automobiles, commodities, steel, and real estate development sectors.

With the Indian rupee depreciating by approximately 13% so far in 2018, the corporate as well as middle-class has had a tumultuous time.

The Rupee touched a historic low of Rs 72.48 to a dollar on Monday.

While corporate, especially the ones who depend on imports have seen the cost of operations rising significantly, the middle class has had its own set of challenges- rising interest rates, spurt in commodities such as Fuel, Gold, and electronics.

The central bank in the past has enacted controls in such situations by either borrowing Dollars from Non-Resident Indians in the form of bonds, or hiked interest rates or purchased dollars in off-market transactions. But so far, there has been no conclusive evidence of the central bank pursuing any of it's past actions.

Weaker Rupee Costlier Fuel

A weaker Rupee also translates into costlier fuel and cost of living for India's middle class. Be it the aspiration of pursuing education abroad, or a quick commute to the market, the impact is everywhere to be seen.

So far, there have been calls for reducing VAT and excise duties, as well as subsuming Petrol and Diesel within the Goods and Services tax bracket to offer a quick solution to fuel hikes. The state government of Rajasthan was reported of reducing excise by 4% making Petrol cheaper by Rs 2.50 from Monday.

On Saturday, Dharmendra Pradhan, the petroleum minister was quoted as saying that subsuming Fuel under GST had become "essential".