Moody's flags concerns over CAD financing

Moody's flags concerns over CAD financing

In an indication that India’s credit rating profile still faces risk, rating agency Moody’s Friday said it will monitor how the country finances its burgeoning current account deficit (CAD).

"If funding for the CAD shifted away from external debt and towards foreign direct investment, the sovereign credit profile would benefit," Moody’s investor Service said in its report.

The CAD has widened to an all time high of 5.4 per cent in the July-September quarter of this fiscal year.

Although it has largely been financed by external capital inflows till now, the composition of capital inflows has shifted in favour of debt, with a rise in the proportion of short-term flows. The FDI inflows have not kept pace.

 Moody's so far has maintained a stable outlook for the Indian economy. It cautioned that setting CAD targets on assumption of acceleration in economic growth "are more likely to be missed,” and added “Policies that trigger private investment and curb inflationary pressures in the near-term are more likely to help narrow the current account deficit.”

The report said, “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.”

 The Reserve Bank of India too has expressed concern over the quality of financing CAD and called for lesser dependence on debt inflows. India’s dependence on volatile foreign inflows to finance CAD increased since the FDI flows have fallen dramatically over a period of time.

According to RBI data, net FDI flows for the April-November of fiscal year 2012-13 fell to $14.7 billion from $19.6 billion in April-November of last year. FII inflows in the same period (Apr-Nov FY13) increased to $11.2 billion from $443 million in the same period last fiscal.

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