Moody's has warned that rising current account deficit and external debt may impact India's credit risk profile because they increase the country's vulnerability to international financial volatility.
The new report from Moody's Investors Service, which has assigned Baa3 with a stable outlook to India, said that India's current account deficit at record high of 5.4% of the gross domestic product in the second quarter ended September and 4.6% in the first half of the current fiscal is partly a result of its domestic policies like fuel subsidies, rise in gold imports despite increase in international gold prices, and loose fiscal policy.
The current-account deficit, which averaged less than 1% of GDP in the first half of the last decade, was 4.2% of GDP last fiscal year.
''In addition to monthly trade data and quarterly current account trends, we will also monitor the specific domestic developments to determine the likely direction of India's external position over the medium-term,'' said the Moody's report titled 'Credit Implications of India's Current Account Deterioration'.
It observed that any near-term improvement in India's current account and external debt metrics depends on domestic changes because global growth in 2013 may be only modestly better than 2012 and commodity prices are unlikely to fall significantly from current levels.
While the government has announced a slew of measures such as allowing global players to enter aviation and retail and liberalising norms for external borrowing, Moody's said it will monitor whether policy changes shift the composition of current account financing in favour of FDI, or whether external debt inflows accelerate faster than investment flows.