“We are assessing different pressure points for our clients with respect to record lows for the rupiah,” said K Ravichandran, ratings director at ICRA Ratings. “Based on the probable impairments of the rupee, we have defined different levels of stress tests, which reveal either the ability of companies to withstand headwinds or to pass on higher input costs to end consumers. “.
The agencies also take into account the intensity of intervention of the Reserve to stop the fall of the rupee. The practice of comparing likely future levels of USD-INR against which companies’ financial means are tested is gaining in importance. For example, if the rupee reaches 81, a certain set of parameters will be applied for a stress test. The test is performed at different levels including 82, 83 and so on.
The spot rupee closed Wednesday at 79.99 to the dollar, slightly lower than 79.95 the day before, according to Bloomberg data. It hit a new all-time low of 80.06 on Tuesday as fears of a recession in the US and European markets continued to spook international investors selling investments in emerging markets, including those in India.
The local unit has so far lost 7.07% against the dollar this calendar year, ranking seventh among Asian currencies.
The RBI sold dollars through some banks to stem the fall of the rupee against the dollar. Dealers observe that central bank intervention has seemingly become predictable around the crucial 80 level.
“We continue to monitor the trajectory of the rupiah, including the likely response of RBI to the recent move,” said Abhishek Bhattacharya, senior director at India Ratings. “We perform scenario analysis for stress test credits with significant offshore liabilities or significant import dependency.”
The RBI, meanwhile, has proposed various measures to bolster foreign exchange reserves and bring back dollars, which will help it continue to actively intervene in the foreign exchange market. It allowed offshore settlements in rupees with currencies other than the US dollar.
India’s foreign exchange reserves fell to a 15-month low of $580.3 billion as of July 8, according to the latest central bank data.
Lately, importers are scrambling to buy dollars as they rush to hedge currency risk against their overseas debts.
“As a ratings agency, we have started to identify relatively vulnerable issuers who are net importers or have large currency debts,” said Suman Chowdhury, director of analysis at Acuity Ratings & Research. “We will assess whether there is a material impact of impairment on their profitability and balance sheet in FY23,” he said.
Importers of computer equipment, steel, fertilizer and coal face a possible downgrade or a revised outlook for the worse.
Rating companies now engage in portfolio reviews.
A company may face an immediate obligation to pay abroad for any sale or loan of bonds. If these repayments come either from rupee income in India or from the payment of dividends to the offshore arms of the borrower, it is negative. Any such scenario, according to the ratings companies, will affect the creditworthiness of borrowers amid the rupee’s lifetime lows.
A borrower also waits for the cost of hedging to come down and then goes for it. This can backfire especially when the rupee hits new highs.