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Journalism of Courage
The outlook downgrade by rating agency Standard & Poor’s (S&P) will increase the risk of further depreciation of the rupee in the near term,Morgan Stanley said in a recent note.
S&P cut its outlook on India’s long-term sovereign credit rating to negative from stable on Tuesday,citing worsening government finances,which could raise firms’ overseas borrowing costs and weaken the rupee.
We believe that over the next 4-months,while the current account is still in deficit,any potential capital outflows due to debt repayments not getting rolled over,as well as portfolio equity flows,will cause depreciation of the rupee,” Chetan Ahya and Tanvee Gupta,economists at Morgan Stanley wrote.
Morgan Stanley said the Indian government did not implement any major structural reforms to cut revenue expenditures which could have been critical to achieve a sustainable reduction in deficit,despite the recent strong economic growth.
A large part of the reduction in deficit over the past few years was due to a higher ratio of tax to gross domestic product,which was largely cyclical in nature,it said.
Morgan Stanley predicts the rupee could test 52-53 levels in the next 4 to 6 months on balance of payments pressures even as the real-effective exchange rate measure indicates that the USD/INR is fairly valued at 50.
