New Delhi: A shift in the composition of capital inflows in India toward foreign direct investment (FDI) from foreign portfolio investment (FPI) will increase the stability of financing and support the country’s sovereign credit profile, Moody’s Investor Service said on Thursday.
According to data by the Reserve Bank of India (RBI), portfolio investment recorded a net outflow of $3.7 billion during April-December 2015, while FDI inflows stood at $27.4 billion during the same period.
Moody’s said rising FDI inflows continue to narrow India’s external financing needs and mitigate the risk of a potential widening of the current account deficit related to weakening remittances, which is a credit positive.
Indians sent back $15.8 billion during the third quarter (October-December) of fiscal 2015-16, the lowest in 18 quarters, data from the RBI showed. India’s current account deficit (CAD) narrowed to 1.3% of the gross domestic product (GDP) in the third quarter from 1.5% in the year-ago period, as the country’s trade deficit contracted.
“We do not expect a significant renewed widening of India’s current account deficit. Our assumption that commodity prices will remain low in 2016 and 2017 supports this view, although there are downside risks to our assessment. Meanwhile, FDI inflows are likely to climb further in response to government measures, such as efforts to liberalize foreign investment limits in several sectors and the ‘Make in India’ initiative,” said Marie Diron, a Moody’s senior vice-president for the sovereign risk group.
“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 and, in particular, in the Gulf states, may dampen remittances,” he added.
Moody’s conclusions were contained in its just-released report, titled ‘Government of India: Rising Foreign Direct Investment Provides Stable Financing of Current Account Deficit, a Credit Positive’.
The report said a lower energy import bill and policy measures to contain gold imports are helping keep 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.
However, the report said the prospects of subdued global economic activity—in particular in Gulf states, the source of more than half the remittances to India—may lead to a significant and prolonged weakening of remittance inflows.
“The rapid rise in FDI inflows mitigates the risks related to a possible widening of the current account deficit from weaker remittances by diminishing India’s external financing needs from other inflows in the form of credit and equity inflows,” the report added.