India’s infrastructure sector can largely withstand rupee depreciation: Moody’s

However, a small number of issuers are vulnerable if the US dollar depreciates in the mid-to-high 80 range, due to their reliance on imperfect financial hedges, the statement said.

“Corporate infrastructure issuers are generally in a better position to manage their exposure than project finance issuers, which rely on common financial hedges that do not completely eliminate currency risk,” said Spencer Ng. , Vice President and Chief Credit Officer at Moody’s.

“In general, corporate infrastructure issuers have characteristics that protect them against currency weakness, including their: (1) ability to recover some of the incremental costs of their regulated tariffs, such as NTPC Limited (Baa3 stable ); (2) access to USD revenues, such as Adani Ports and Limited Special Economic Zone (Baa3 stable); and (3) less concentrated exposure to USD debt as part of their overall debt structure,” the agency said in the statement.

In contrast, project finance issuers typically rely on imperfect financial hedges due to very high hedging costs in India and limited availability of long-term products.

Depending on their hedging strategy, project finance issuers will face different residual exposure depending on currency fluctuations over time. Although hedging strategies have so far been effective, a sustained decline in INR could put some issuers under pressure.

“Nevertheless, issuers have additional provisions to reduce their credit exposure. These include dedicated reserves to help support the renewal of shorter-term hedges or sponsor support mechanisms provided to project finance transactions” , said Moody’s.

“While these additional provisions provide another layer of protection for bondholders, their effectiveness will be limited by factors such as the project sponsor’s supportability,” the rating agency added.

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