India is among the countries that are most vulnerable to capital outflows as it relies heavily on external funding, global credit rating agency Moody’s cautioned on Monday.
“India and Indonesia are the most vulnerable to capital outflows because of high reliance on external funding,” Moody’s Analytics said in its report - ‘How US Monetary Tightening Affects Asian Markets’.
It said the impact of recent Fed announcements on bond yields have exposed structural flaws in Asian economies, particularly in India and Indonesia.
Moody’s said the US Fed’s talk earlier of a likely tapering of monetary stimulus depreciated the rupee by 15 per cent, making it the worst performing currency in Asia.
The US Federal Reserve last week surprised the markets by saying it will continue with its monthly USD 85 billion bond buying programme and wait for more evidence of growth recovery before thinking of unwinding the stimulus.
Expectations that the stimulus programme would be tapered had led to fears of capital outflows, causing the rupee to depreciate against the dollar and stocks to fall. The rupee touched a low of 68.86 to the US dollar on August 28. It is currently trading around 62.83 to a dollar.
Reserve Bank Governor Raghuram Rajan, while announcing the mid-quarter monetary policy review last week, said India needs to build a “bullet-proof national balance sheet” to deal with the fallout on the economy from US Fed’s tapering of stimulus that has been only been postponed not done away with. The report meanwhile also noted that even the economies with current account surpluses have not been immune to the sell-off.