CHENNAI: Credit rating agency Moody’s Investors Service on Thursday said India’s rising foreign direct investment (FDI) inflows reduces the current account deficit and also the external financing needs.
In a statement Moody’s said it does not expect widening of India’s current account deficit based on its assumptions that commodity prices will remain low in 2016 and 2017.
According to Moody’s, FDI inflows are expected to climb due to central government’s measures like liberalization of foreign investment limits and “Make in India” initiative.
“These trends are credit positive, as they lower India’s susceptibility to external shocks at a time when capital flows to emerging markets are volatile and weak economic conditions globally, particularly in the Gulf states, may dampen remittances,” said the Moody’s statement, quoting Marie Diron, senior vice-president for the Sovereign Risk Group.
According to Moody’s, 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 per cent — or Rs 3 trillion ($44.3 billion) — in the 12 months to February 2016 compared with the previous year, despite a 10 per cent increase in the volume of petroleum imports, Moody’s said.
However, the prospect of subdued global economic activity — in particular in the Gulf states where more than half of remittances to India originate — may lead to a significant and prolonged weakening of remittance inflows.