Indias current account deficit widened from less that
1% of gross domestic product in the first half of the 2000s to
a recent peak of 5.3% of GDP in the third quarter of last year,
Atsi Sheth, vice-president and senior analyst at Moodys
Investors Service, said.
The countrys external debt doubled from 2006 to $365
billion at the end of the third quarter 2012, the current
account deficit being financed chiefly by debt
flows, Sheth said.
While its external debt/GDP ratio of 22% is still
relatively modest compared to similarly rated peers, a
continued rise in current account deficits and external debt
would increase the countrys vulnerability to
international financial volatility, with negative implications
for the sovereign credit profile, she wrote in a recent
commentary on India .
The merchandise trade deficit, which more than doubled to
$49 billion at the end of September last year from the end of
2007, is the main factor behind the widening of the current
account deficit, due to the global slowdown which has cut
demand for Indian exports, robust Indian demand for oil and
gold despite rising prices for these commodities and
loose fiscal policies that buoyed domestic demand,
according to Sheth.
She believes Indias domestic policies are partly to
blame for the widening of its current account deficit, which
has exceeded that of many similarly-rated peers operating
in the same global environment, even those that are similarly
reliant on energy imports.
The rating agency will watch 4 more factors in India besides
the monthly trade data and the quarterly current account trends
to gauge where the countrys external position is going
over the medium term.
On the fiscal policy front, more important than the target
for the budget deficit will be the assumptions behind that
target and the specific policies announced on expenditure and
Policies that trigger private investment and curb
inflationary pressures in the near-term are more likely to help
narrow the account deficit, whereas deficit targets based on an
assumption of accelerating growth rates are more likely to be
missed, leading to higher government borrowing requirements and
likely inflationary pressure, both of which have negative
implications, Sheth explained.
Inflation and interest rates will also be closely watched.
Recent fuel price hikes due to the elimination of some
subsidies, a pick-up in growth or rising food prices could
cause inflationary pressures to resurface, she said, adding
that higher Indian inflation would make exports more expensive,
imports cheaper and interest rates higher, widening the current
Domestic investment is an important factor as, if it does
not pick up despite an improving growth outlook and recent
policies to revive it, it would suggest diminished
competitiveness of the private sector which would also
negatively affect the current account, Sheth added.
Finally, foreign investment and external debt will also be
closely watched to reveal whether policy changes to boost
foreign investment help to shift the composition of financing
of the current account gap in favour of foreign direct
If funding for the current account deficit shifted
away from external debt and towards foreign direct investment,
the sovereign credit profile would benefit, Sheth
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