Lower CAD limits India's exposure to global shocks: Moody's

Rating agency assigns 'Baa3' rating on India, with a stable outlook

Fall in high Current Account Deficit (CAD) limits India's vulnerability to global financial market volatility although elevated inflation still poses risks, says rating agency Moody's.

Moody's assigns 'Baa3' rating on India, with a stable outlook.

"With India, signs of a decline in its high CAD as a percentage of GDP and the make up of the government's debt profile limit the extent of sovereign exposure to global financial market volatility. But continued higher inflation poses risks," Moody's Investors Service said in a report.

Wholesale price-based inflation stood at a nine-month low of 4.68%, while retail inflation slowed to a 25-month low of 8.1% in February.

Rising exports and moderation in gold imports have pulled down CAD sharply to $4.2 billion, or 0.9% of GDP, in December quarter of 2013-14.

It narrowed to $31.1 billion (2.3% of GDP) in April-December 2013, from $69.8 billion (5.2% of GDP) in April-December of 2012.

The CAD, which reflects difference between inflow and outflow of foreign currency, had touched a record-high of $88.2 billion, or 4.8% of GDP, in 2012-13.

In the context of Asia, the report said the recent financial market volatility and pressure on emerging market currencies have underscored the potential vulnerability these markets face during an extended period of uncertainty.

"Those with external imbalances, a reliance on external funding, and weak policy frameworks will remain vulnerable to sentiment changes, capital flow adjustments, or disorderly market reactions," it said.

The key indicators of external vulnerability include a large CAD, low foreign exchange reserves, large government gross borrowing, and high foreign currency denominated debt as a proportion of total general government debt, the report added.