In a report released on Thursday, Moody’s Corporation said that India is less susceptible to external shocks, as the increasing Foreign Direct Investment (FDI) provided stable financing of the South Asian country’s current account deficit. The US-based credit ratings agency also said that the Indian economy is performing well, with net FDI inflows hitting an all-time high in the first quarter of 2016.
According to the report, India has successfully lowered its current account deficit for the first time since 2004. “The strength of inflows reflects India’s relatively strong growth prospects and government efforts to liberalise foreign investment regulation,” stated Moody’s. The ratings agency also predicted that India’s FDI inflow would jump in the coming months and provide stability to its economy.
Meanwhile, Moody’s congratulated the Narendra Modi government in New Delhi for taking necessary steps to boost the economy, saying that low commodity prices would keep India’s imports in check. The decline in imports will help India lower its trade deficit, believes the agency. Moody’s further advised India to increase its exports in order to strengthen the economy.
“We expect domestic demand to gradually pick up in the fiscal year ending March 2017, which could push up import volumes to some degree. However, with commodity prices – particularly oil – likely to remain depressed, we do not expect a marked renewed widening of India’s trade,” read the report, titled: “Rising Foreign Direct Investment Provides Stable Financing of Current Account Deficit, a Credit Positive”.
At the same time, Moody’s asked India to concentrate on remittances and services exports, stressing that weakening remittances and services exports could have a negative impact on the country’s current account, as these two are the biggest sources of forex (foreign exchange market) inflow. In its report, Moody’s mentioned that there was a 30% drop in worker remittances (compared to the previous year) in October-December 2015.
“Against a backdrop of subdued global economic activity, in particular in the Gulf – the origin of more than half of remittances to India, remittance inflows could weaken further in the coming months. A significant and prolonged slowing of remittance inflows could lead to a renewed widening of the current account deficit. Persistent weakness in services exports could add to these pressures,” added the rating agency in its report.