The ongoing free fall of the rupee against the US dollar is credit negative for Indian companies, especially for those that generate revenue in rupees but rely on dollar debt to fund their operations and have substantial dollar-based expenses, Moody's Investors Service said on Monday.
The American credit rating agency's report on the weakening rupee was published on the day the Indian currency touched a new low of 72.67 on Monday, depreciating by almost a rupee from its previous close of 71.73 per US dollar. The rupee has depreciated 13 per cent so far this year against the dollar.
"A sustained "weakening of the rupee would be credit negative for its rated Indian companies, particularly those that generate revenue in rupees but rely on the US dollar debt to fund their operations and have significant dollar-based costs, including capital expenses," Moody's said."
However, of the 24 Moody's-rated India-based corporates across the high-yield and investment-grade categories, 12 generate most of their revenue in US dollars or have contracts priced in the greenback, providing a natural hedge, and thus limiting the effect a weakening in the rupee could have on their cash flows, it said.
"Nevertheless, most rated India-based corporates have protections in place, including natural hedges, some US dollar revenues and financial hedges, to limit the negative credit implications of a potential further 10 per cent weakening of the rupee to the US dollar from Thursday's (September 6) rate," Moody's Vice President Annalisa D'Chiara said in the report.
"Furthermore, the impact of the rupee's weakening will be diverse and will also depend on issues such as a particular corporate's reliance on exports, its cost base, and its exposure to pricing on international markets," she added.
The 24 corporates rated by Moody's include those in the IT, oil and gas, chemicals, automobiles, commodities, steel and real estate sectors.
According to the US agency, weaker credit metrics under a scenario of a further 10 per cent drop in the value of the rupee, from the rate on September 6, can be accommodated in the companies' current rating levels.
"Furthermore, refinancing risk associated with the companies' US dollar debt maturing over the next 12 months is manageable," it said.
The Moody's report follows its annual survey of the US dollar debt exposures of South and Southeast Asian high-yield companies, published in June 2018, which considered the effects of the rupee weakening to around Rs 78 to the US dollar.