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India's external finances are becoming "less of a strength" but continue to be sufficient to cushion risks emanating from abroad, Fitch Ratings said on October 19.

"External finances are becoming less of a strength in India's credit profile, but we expect foreign-exchange reserves to remain robust and India's current-account deficit to be contained at a sustainable level," the rating agency said in a note.

The comments by Fitch, which rates India at BBB-with a stable outlook, come amid a sharp decline in the country's foreign exchange reserves, which have been deployed by the Reserve Bank of India (RBI) to stem a rapid fall in the rupee.

According to data released earlier this week, the RBI sold a gross $23.11 billion in August following the record-breaking sale of $38.77 billion in July. However, despite the central bank's intervention in the foreign exchange market, the rupee has continued to weaken against the greenback and crossed the 80-per-dollar mark for the first time in mid-July.

Earlier on October 19, the rupee sank to a new low after it broke past 83 to a dollar.

"The RBI recently reiterated that it does not have a target level for the exchange rate, but we expect the authorities will continue to use reserves to manage exchange-rate volatility. This will probably erode reserve buffers further in the near term, but the impact will depend on the scale and duration of intervention," Fitch said.

Sliding rupee 

So far this calendar year, the rupee has depreciated by over 10 percent against the dollar, while India's foreign exchange reserves have fallen below $550 billion.

On October 7, India's foreign exchange reserves stood at $532.87 billion, down $110 billion from its early September 2021 peak of $642.45 billion.

"Reserve cover remains strong at about 8.9 months of imports in September. This is higher than during the 'taper tantrum' in 2013, when it stood at about 6.5 months, and offers the authorities scope to utilise reserves to smooth periods of external stress. Large reserves also provide reassurance about debt repayment capacity. Short-term external debt due is equivalent to only about 24 percent of total reserves," Fitch noted.

However, it added that public finances continue to be the key driver of India's rating and are only "modestly affected" by current external developments due to the limited exposure to external financing.

"Gross external debt stood at 18.6 percent of GDP in 2Q22 (April-June), which is low compared with the median of 72 percent for 'BBB' rated sovereigns in 2021. Sovereign exposures are small, with only about 4 percent of GDP in primarily multilateral financing," Fitch said.

The rating agency expects India's current account deficit to widen to 3.4 percent of the GDP in FY23, nearly three times the FY22 level of 1.2 percent.

Commenting on the Indian monetary policy, Fitch said there were upside risks to its forecast of the repo rate peaking at 6 percent in FY24 due to a "significant chance" of interest rate hikes in the US exceeding what its forecasts assume.

On September 30, the RBI's Monetary Policy Committee increased the repo rate by 50 basis points to 5.9 percent, taking its cumulative rate hikes since the start of May to 190 basis points in its battle to lower persistently elevated inflation.

In India, political funding and the mechanism to raise monies remain a bone of contention amid arguments over transparency in donations from individuals, groups, and entities, especially the big corporations. The exercise of conducting elections are now a regular feature every year largely on account of elections to the state assemblies that follow different cycles of completion of tenures.

Elections require political parties to spend huge amount of money for a range of activities, from advertising to logistics, and much more. Over the years parties have raised funds through various methods with donations from supporters, party workers, and businesses (small and big) which poured in largely in the form of cash.

In order to address the challenge of cash collection, and to formalise fund raising channelised through the banking system, the then Finance Minister Arun Jaitley during the 2017 Budget mentioned of electoral bonds aimed at cleansing the mechanism and injecting transparency. Nearly a later, the Government of India notified the scheme.

According to reports compiled by the Association of Democratic Reforms, a non-government organisation working for improvement in India’s electoral system, between March 2018 and July 2022, 18,779 electoral bonds worth Rs 10,245.2 crore were sold, and most of it were encashed by political parties. The ADR and two others challenged the electoral bonds in the Supreme Court, which heard the matter recently, and scheduled to take it up further in December.

During debates, several political parties raised objections when relevant laws of income tax, foreign contributions, companies and representation of the people, were amended to incorporate features of the electoral bonds on the grounds that the new mechanism contained opaqueness. The amendments among other features allowed anonymity to the extent that only the donor knows how much has been distributed to a political party. The government defended the provision that past experience showed that donors did not find attractive the scheme where donations were made public, and thus preferred cash donations. The earlier provision required political parties to identify donations over Rs 20,000.

The electoral bond is the method through which a citizen or a body incorporated in India is eligible to purchase the bond, which is issued for any value in the multiples of Rs 1,000, up to Rs 1 crore. These bonds are issued periodically for a limited time by specified branches of the State Bank of India. These instruments in the form of interest-free promissory notes can be purchased by fulfilling KYC norms and through a bank account. The beneficiary political party identified by the purchaser can get the donation only if it is registered, and secured not less than one percent of the votes at the last Lok Sabha or assembly elections.

Explaining the rationale and benefit of the new system of funding envisaged, late Jaitley had said in an article: “…the choice has now to be consciously made between the existing system of substantial cash donations which involves total unclean money and is non-transparent and the new scheme which gives the option to the donors to donate through entirely a transparent method of cheque, online transaction or through electoral bonds.” He then noted that the government was willing to consider all suggestions to further strengthen the cleansing of political funding.

The idea of regulating political donations through regular banking channels introduced an element of transparency, but there is scope to improve and take steps in the direction of increasing reporting and mandatory disclosures.

Indian authorities have asked a court to quash Pernod Ricard's bid to halt proceedings related to a $244 million tax demand, accusing the French spirit giant of being a "habitual litigant" and conspiring to "defraud" the government, legal documents show.

The Oct. 3 Mumbai court filing by India's customs authority, which has not been reported previously, underlines the growing dispute between Prime Minister Narendra Modi's government and Pernod's local unit over how the company valued some of its imports for over a decade.

The customs authority says Pernod did so to evade full payment of import taxes.

The tussle comes when Pernod Ricard is facing business and regulatory stress in India, one of its key growth markets where it accounts for a 17% share. It has previously told Modi that long-running disputes over the valuation of liquor imports had "inhibited fresh investments" in India.

After India demanded back taxes from the maker of Chivas Regal and Absolut vodka in June, Pernod challenged it in court, saying the investigation should be put on hold as it relied on incorrect industry data, and the process was "neither fair nor reasonable."

In the 43-page October filing, India's customs authority said the French company was resorting to "delay tactics" by approaching a court for relief, instead of responding to the government's tax demand notice.

It accused the company of a conspiracy "to defraud the Govt. of India of its legitimate revenue."

Pernod has been "a habitual litigant and always attempts to abuse the due process of law," the filing added, referring to some previous tax demands Pernod challenged in India.

Asked for comment, Pernod referred Reuters to a previously issued statement, which said the company is actively working on demonstrating its position to Indian authorities and has "always endeavoured to act with full transparency and in compliance with customs and regulatory requirements."

It declined further comment due to ongoing litigation and because the filing by the customs authority wasn't public. The court case will next be heard on Oct. 20 in Mumbai.

The Indian investigation assessed Pernod India's import bills of liquor concentrates from a group subsidiary, UK-based Chivas Brothers, and found they were undervalued for years.

To compensate for the undervalued imports, Pernod paid "hefty" dividends to the group's holding company, Pernod Ricard in France, which also owns Chivas Brothers, the investigation found. Import duties on liquor concentrates are 150% while dividends attract lower taxes.

The long-standing tax disputes Pernod faces in India has led to business uncertainty - in July, the company wrote a letter to a federal tax authority saying the company was "facing significant business continuity challenges", asking for a resolution.

Last week, Pernod said its India CEO, Thibault Cuny, had stepped down due to health reasons.