India's external liquidity strong: Moody's

In its new annual report on India, Moody's Investors Service explains that healthy external liquidity merited the recent upgrade of its country ceiling for foreign currency debt to Ba1 at the same time that the government's fiscal problems keep the rating at sub-investment grade.

The government's local currency debt rating remains at Ba2, with a negative outlook, as a consequence of its more onerous burden of domestic debt and debt service.

The country ceiling on foreign currency-denominated bank deposits likewise stands at a Ba2 with a negative outlook, reflecting Moody's assessment of the close linkage between the risk of a government domestic debt restructuring and the potential for restrictions on large foreign currency withdrawals from the banking system.

Moody's points out that India's external liquidity and vulnerability ratios now compare very favorably to others in its rating peer group.

Double-digit export gains and a prospering information technology sector have belied the slowdown in the global economy, and the balance of payments surplus has been bolstered as well by increasing capital inflows.

The rating agency report states that the country's strong foreign assets are likely to cushion the balance of payments against macroeconomic or political shocks, especially as capital controls are eased gradually going forward.

However, Moody's analysts caution against over-reliance on current and capital inflows from non-residents, which are not impervious to such shocks.

Moody's analysts also remain worried that structural economic problems such as the poor state of the government finances will increasingly arrest growth and revenue prospects through infrastructure and social development shortfalls.

With state/national elections on the horizon and divisive domestic politics, the rating agency believes an aggressive effort to narrow the budget gap cannot be implemented in the near term.

Still, Moody's is guardedly hopeful that the finance minister will propose measures to incrementally reduce the huge Budget shortfall in his FY2003/04 Budget announcement on February 28.