Attributing the rupee’s fall to a widening current account deficit (CAD), Moody’s said the depreciating value of the domestic currency is likely to inflate the fuel subsidy bill, weaken the credit quality of oil companies and put pressure on the fiscal deficit.

“Despite previous price liberalisation in the petroleum sector, the subsidy bill is likely to rise due to depreciation, thus widening the Government’s deficit, which is also under pressure from slower revenue growth,” said Moody’s Investors Service in an e-mail reply.

The depreciation of the rupee, it said, reflects the wider CAD as well as lower net capital inflows.

Continuing its slide, the rupee today breached the 64-mark against the dollar by falling 98 paise to trade at a record low of 64.11 on persistent dollar demand in early trade.

“We believe the currency will remain under pressure until the current account deficit narrows meaningfully, or capital inflows accelerate due to an improving growth outlook,” Moody’s said.

Meanwhile, a report by the rating agency said the rupee’s fall will weaken the credit quality of State-owned oil marketing and upstream oil companies during the current fiscal if the Government continues to ask them to share a higher fuel subsidy burden as it did in April-June.

“We now expect fuel subsidies for FY 2014 at Rs 1.4-1.5 lakh crore, up from the Rs 1.3 lakh crore expected in June 2013,” said Vikas Halan, Moody’s Vice-President and Senior Analyst.

The report cites the ongoing depreciation of the Indian rupee and the rising crude oil prices as the reasons for the upward revision of its fuel subsidy estimate for 2013-14.

“If the Government continues with the same subsidy-sharing formula, as in the April-June quarter, then the credit quality of the State-owned oil companies will weaken further,” Halan added.

Related Topics
comment COMMENT NOW