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Informist, Friday, Mar. 28, 2025

 

NEW DELHI – Even as Indian authorities and companies brace for impact from the US' reciprocal tariffs that will be imposed on Wednesday, global rating agencies are squarely focused on the domestic economy and local drivers of demand and growth in general, with any possible deterioration in India's external strength not on their minds.

 

Just the threat of reciprocal tariffs has roiled global financial markets, with India not immune even though its exports to the US make up just about 2% of GDP. The rupee, prior to the pullback in March, had hit multiple all-time lows and was only stopped from breaking past the 88-per-dollar mark by the Reserve Bank of India launching an extraordinary defence in mid-February when it sold tens of billions of dollars to stem the currency's slide.

 

The RBI's defence of the rupee has been astonishing: the central bank sold $217 billion on a gross basis in just Oct-Jan, almost as much as in the previous 12 months put together. Meanwhile, the foreign exchange reserves are still down more than $50 billion from the end of September despite the additions made to it through the multiple buy/sell swap auctions. But while the reserves were up to $654 billion by mid-March, the number must be adjusted for the RBI's net short forward position, which has increased to record highs and stood at $78 billion at the end of January and has likely increased further since then. As such, the RBI's reserves are closer to $550 billion, resulting in an import cover of just over nine months. And yet, what matters to watchers of the economy's underlying strength is the local demand.

 

"...domestic demand is a much more material consideration for India's growth than its peers in other developing Asian economies, which are much more export-oriented and play larger roles in global supply chains," Christian de Guzman, senior vice president at Moody's Ratings, told Informist in an e-mail, adding that external vulnerability risk is not as important of a consideration in India's credit profile as it is in other emerging markets.

 

"In part, this reflects the government and the private sector's reliance on domestic sources of funding that is mirrored in the manageable level of India's external debt. As such, we see limited risks to India's broader credit profile as long as we see reserves remaining well above India's cross-border debt servicing requirements."

 

Moody's rates India at Baa3 with a stable outlook.

 

LOW TARIFF RISK

For S&P Global Ratings, India's low exposure to US reduces the risk from tariffs, with even the indirect impact--from slowing global growth, for instance--only having a limited effect due to the export sector amounting to just over 10% of the GDP. "Years of credit improvements and healthy economic growth also reinforce rated firms' resilience. That said, new US duties may redirect trade flows to the country, which could disrupt sectors such as steel and chemicals," S&P analyst Neel Gopalakrishnan said in a report on Mar. 20.

 

Even according to Fitch Ratings, the threat to India from the US' trade policies, while a risk, is limited.

 

"We expect overall GDP growth of 6.5% in FY26 and a slight slowdown in growth in FY27, to 6.3%... More aggressive-than-expected US trade policies are an important risk to our forecast, though India is somewhat insulated given its low reliance on external demand," Fitch said in its Global Economic Outlook report on Mar. 18. Both S&P and Fitch have a BBB- rating on India, although the former has a positive outlook and the latter stable.

 

To be sure, India's growth is an issue. Local rating agency CareEdge, which has a BBB+ rating on India with a stable outlook, Friday said that the statistics ministry's second advance estimate of 6.5% for growth in 2024-25 (Apr-Mar) "looks ambitious". And while high-frequency data suggest improvements in certain segments of the economy, the recovery "remains uneven".  End

 

US$1 = INR 85.63

 

Reported by Siddharth Upasani

Edited by Ashish Shirke

 

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