Rising FDI helping India narrow external finance needs: Moody's

Rating agency says it will mitigate the risk of widening of current account deficit

Global rating agency, Moody's, today said that rising foreign direct investment (FDI) inflows continue to narrow India's external financing needs.

It will mitigate the risk of a potential widening of the current account deficit (CAD) related to weakening remittances and is a credit positive, Moody's said in a statement.

"We do not expect a significant renewed widening of India's current account deficit. Our assumption that commodity prices will remain low in 2016 and 2017 supports this view, although there are downside risks to our assessment", Moody's said in a statement.

Meanwhile, FDI inflows are likely to climb further in response to government measures, like liberalized FDI for limits in several sectors and the 'Make in India' initiative.

Marie Diron, a Moody's Senior Vice President for the Sovereign Risk Group said these flows help to lower India's susceptibility to external shocks at a time when capital flows to emerging markets are volatile. The weak economic conditions, especially in the Gulf states, may dampen remittances.

Moody's released report titled "Government of India: Rising Foreign Direct Investment Provides Stable Financing of Current Account Deficit, a Credit Positive".

It said that a lower energy import bill and policy measures to contain gold imports are contributing to keeping the trade deficit at moderate levels.

Going forward, the announcement in the latest Budget of the imposition of an excise tax on gold is likely to dampen overall gold imports. 

Additionally, the value of oil imports decreased by 37.5% (Rs 3 trillion or $44.3 billion) — in the 12 months to February 2016 compared with the previous year. This was despite a 10% increase in the volume of petroleum imports.

However, the prospect of subdued global economic activity — in particular in the Gulf states, the origin of more than half of remittances to India— may lead to a significant and prolonged weakening of remittance inflows. This development is likely to prevent India's current account from returning to balance and could lead to its renewed widening, it added.