As per the Moody's Investors Services report claims the Indian rupee's continuing devaluation cannot be brought to halt by just triggering inflows into the country. The investment firm's report came as a big negative for the Indian economy which saw rupee to plunge further taking markets along which nosedived by 300 points.
In accordance with the report, the financial concern is of the view that the govt's withdrawal of withholding tax @ 5% on rupee-denominated masala bonds issued to offshore entities as well as allowing banks to become market makers for the same will increase inflow into the country by as much as USD 8-10 billion, or 0.3-0.4 per cent of GDP, in the fiscal year that ends March 31, 2019.
Also, it stressed on limiting imports of unnecessary imports and to maintain the fiscal deficit target.
Moody's said, "Although these measures provide credit positive support to India's external account, they are unlikely to reverse the currency's depreciation". It added, "The measures will likely take time to affect capital inflows. Moreover, although the potential removal of hedging requirements could reduce some short-term pressure on the rupee, it could also heighten corporates' exposure to currency fluctuations".
Also, it said while the move to reduce non-essential imports will move the import bill lower, nonetheless, it is expected to have a lagged effect.
The CAD, difference between inflow and outflow of foreign exchange, widened to 2.4 per cent of GDP in the April-June quarter. "The large foreign-currency reserves provide additional policy space and flexibility for the central bank to manage external shocks and reduce the risk of sustained and large portfolio outflows, as well as pressure on the currency," Moody's said. Oil prices are seen as another negative for the Indian economy.
"Those pressures include the lowering of goods and services tax rates on a range of consumer goods and a tax cut for small businesses, as well as the relatively high minimum support prices set for this year," Moody's said.
"We, therefore, see risks that the central government deficit will be wider than targeted and expect the general government deficit (central and states) to be around 6.3 per cent of GDP in fiscal 2019, compared with 6.5 per cent the previous year," Moody's said.