News Column

Emergence of coalition govt may weaken rupee

February 11, 2014

Bloomberg News

Mumbai: The emergence of an Indian coalition government of smaller parties after elections this year may weaken the rupee and heighten risks to the nation's credit ratings, Moody's Investors Service said yesterday.

"A fragmented coalition will be the biggest threat to the credit quality," Rahul Ghosh, a vice-president and senior research analyst for the credit-rating company, said in a statement yesterday.

"If a coalition of smaller, regional parties without a common economic reform agenda were to take the helm, it would likely provoke further capital flight, thereby increasing borrowing costs and weakening the Indian rupee, and delaying economic recovery."

Eleven Indian regional parties holding about a fifth of seats in the 545-member parliament last week formed a bloc to coordinate positions in the current session of parliament, a precursor to a possible coalition in elections due by May. Opinion polls show the opposition Bharatiya Janata Party winning the most seats while falling short of a majority.

Moody's rates India's long-term foreign currency and local currency debt at Baa3, the lowest investment grade, with a stable outlook. Standard & Poor's warned in November of a downgrade if elections don't produce a government capable of reviving an economy that grew at the slowest pace in a decade in the last fiscal year.

Regional parties

"The increasing importance of regional parties will continue to hamper the efficacy of nationwide policy making, regardless of the political complexion of the eventual central government," Moody's Ghosh said.

The rupee, which has declined about 14 per cent in the past year, rose 0.1 per cent to 62.43 per dollar in Mumbai. The S&P BSE Sensex index gained 0.3 per cent, while the yield on the 10-year government bond rose to 8.70 per cent from 8.69 per cent on Monday.

The regional parties are modeling themselves on the United Front, which ran India's government from 1996 to 1998 after neither of the two main parties was able to form a coalition.

A similar alliance took power in 1989. Neither of the so-called third-front governments survived a full five-year term.

Prime Minister Manmohan Singh'sCongress Party is set for its worst election performance since India's independence in 1947. The BJP will win 188 seats in the 545-member lower house, while Congress will win 91 seats, according to a C-Voter poll for India Today published on January 23.

We don't "believe that a strong showing by one of the major parties would, by itself, translate into an immediate improvement in India's economic growth and fiscal consolidation, which are key determinants of the country's overall credit quality," Moody's said.

Fiscal deficit

Asia's third-biggest economy grew 4.5 per cent in the fiscal year through March 2013, the slowest in a decade, according to government estimates. The Statistics Ministry predicts the $1.8 trillion economy may expand 4.9 per cent in the fiscal year ending March 31.

Finance Minister P.alaniappan Chidambaram has vowed to reduce the fiscal deficit to 4.8 per cent of GDP  in the financial year ending March 31.

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Source: Times of Oman

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