Higher than expected interest rate hikes in the United States could put further downward pressure on the rupee and increase imported inflation in India, but there is limited risk to the country’s sovereign rating due to external pressures, Fitch Ratings said on Wednesday.

“The Reserve Bank of India (RBI) recently reiterated that it does not have a target level for the exchange rate, but we expect the authorities to continue to use reserves to manage exchange rate volatility. This will erode probably more short-term buffer reserves, but the impact will depend on the scale and duration of the intervention,” the ratings firm noted on a day when the rupee slipped below 83 to the US dollar according to provisional figures.

While domestic factors are the main driver of the RBI’s monetary policy tightening, Fitch said risks to its current forecast of a maximum repo rate of 6% in 2023-24 are “biased on the upside. “.

“There is a significant possibility of rate hikes in the United States beyond our assumptions, which could put further downward pressure on the rupee and increase import price inflation,” he said. declared.

Although external finance is “becoming less and less of a force” in India’s credit profile, the global ratings major said it expects foreign exchange reserves to remain strong and the deficit of the current account is “contained at a sustainable level”.

“India’s external reserves appear sufficient to cushion the risks associated with rapid monetary policy tightening in the United States and high global commodity prices…Public finances remain the main driver of the rating and are not only moderately affected by these developments, especially since India is relatively isolated from global markets, due to volatility due to the sovereign’s limited reliance on external funding,” the company said in a note.

While India’s foreign exchange reserves shrank by $101 billion between January and September this year, Fitch said they were still significant at around $533 billion and provide reserve cover.” solid” to support 8.9 months of imports.

“This is higher than during the ‘tantrum’ in 2013, when it stood at around 6.5 months, and offers authorities the opportunity to use reserves to smooth out periods of external stress. Significant reserves also provide reassurance on the ability to repay debt,” the company said, adding that short-term external debt owed only amounted to about 24% of total reserves.

Fitch expects India’s current account deficit to reach 3.4% of GDP in 2022-23 from 1.2% last year, given surging imports from strong domestic demand as well as high oil and coal prices.

Recessions in major European and US export markets will weigh on near-term export prospects, although export growth has already moderated after June, he said.

While Fitch estimates the deficit will narrow to around 2% in 2023-24 due to lower energy prices moderating the import bill, it expects the current account deficit to be larger. than pre-pandemic levels over the next several years.

“This is partly because we see fiscal deficits remaining above pre-pandemic levels, with only gradual consolidation, amid rising government investment spending,” he explained. .