Singaporean brokerage firm DBS today cited the recent fall in the rupee as a potential risk to the sovereign rating of the country, saying a risk of downgrade to junk status continues to be a possibility.
"Downgrade risks still on the table," it said in a note issued today.
It pointed out that while the Reserve Bank is trying its best to curtail the volatility in the rupee, which has depreciated by almost 12 per cent this fiscal, the foreign exchange reserves are contracting.
At the end of March, the reserves contracted to 74.9 per cent of the external debt as opposed to 85.2 per cent in the year ago period, it said, adding that external debt has also risen to a decade high of 21 per cent of GDP.
Large debt outflows following the US Federal Reserve's announcement on a possible withdrawal of its stimulus measures in May, along with the high current account deficit, have led to the fall in the rupee.
However, DBS said, "Even as stability might return after the schedule and pace of the US Fed tapering exercise becomes known, there is limited headroom for the rupee on domestic pitfalls."
Earlier in a similar commentary, international rating agency Moody's had also voiced concerns on the rupee fall saying it can impact the sovereign rating.
Last year, a majority of the major international credit rating agencies had threatened to downgrade the country's rating to non-investment grade or junk status over concerns on high fiscal deficit and low growth, along with others like a perceived 'policy paralysis'.
The Government had successfully managed to put off such an event, with a rash of reforms and meeting the fiscal deficit target through expenditure cuts.
The steps were acknowledged by Fitch, which upgraded its outlook on India to "stable" from "negative".
Sovereign downgrade risk still on table for India: DBS
The weak rupee, along with slow growth, deterioration in the current account, and the likelihood of fiscal worries could revive sovereign ratings downgrade risks for the country, DBS says in a note.
DBS notes the country's forex reserves continue to contract. The total foreign exchange reserves as a percentage of total external debt, now stands at 74.8 percent versus 85.2 last year.
The bank notes rebuilding of the foreign exchange reserves will remain a challenging task in the current environment with exports remaining on the backfoot.
"Even as stability might return after the schedule and pace of the U.S. Fed tapering exercise becomes known,