Lower CAD limits India's exposure to global shocks: Moody's

Fall in high current account deficit limits India's vulnerability to global financial market volatility although elevated inflation still poses risks, says rating agency Moody's.

Moody's assigns 'Baa3' rating on India, with a stable outlook.

"With India, signs of a decline in its high CAD as a percentage of GDP and the make up of the government's debt profile limit the extent of sovereign exposure to global financial market volatility.

“But continued higher inflation poses risks," Moody's Investors Service said in a report.

Wholesale price-based inflation stood at a nine-month low of 4.68 per cent, while retail inflation slowed to a 25-month low of 8.1 per cent in February.

Rising exports and moderation in gold imports have pulled down CAD sharply to $4.2 billion, or 0.9 per cent of GDP, in December quarter of 2013-14.

It narrowed to $31.1 billion (2.3 per cent of GDP) in April-December 2013, from $69.8 billion (5.2 per cent of GDP) in April-December of 2012.

The CAD, which reflects difference between inflow and outflow of foreign currency, had touched a record-high of $ 88.2 billion, or 4.8 per cent of GDP, in 2012-13.

In the context of Asia, the report said the recent financial market volatility and pressure on emerging market currencies have underscored the potential vulnerability these markets face during an extended period of uncertainty.

"Those with external imbalances, a reliance on external funding, and weak policy frameworks will remain vulnerable to sentiment changes, capital flow adjustments, or disorderly market reactions," it said.

The key indicators of external vulnerability include a large CAD, low foreign exchange reserves, large government gross borrowing, and high foreign currency denominated debt as a proportion of total general government debt, the report added.