Global rating agency Moody's today said pursuing policies to boost private investments and curbing inflation can help India trim its Current Account Deficit (CAD), which touched a record high of 5.3 per cent in September quarter.
Moody's, which has a stable outlook for the Indian economy, cautioned that setting CAD target on assumption of acceleration in economic growth "are more likely to be missed".
"Policies that trigger private investment and curb inflationary pressures in the near-term are more likely to help narrow the account deficit...," Moody's Investors Service said in its report.
"... 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," it said.
The CAD, which is the gap between the inflow and outflow of foreign currency, has been widening on account of higher volumes of gold and oil imports. CAD stood at 4.2 per cent of the total GDP in 2011-12 financial year.
"In addition to further policy reforms, it is the execution of policies that will determine how export and import growth evolve," Moody's said.
The trade deficit in January widened to USD 20 billion in January, the second highest rise ever in a month. The biggest trade gap of USD 21 billion was recorded in October, 2012.
The government has already taken a host of reform initiatives including liberalising FDI norms for various sectors, to increase foreign investment flows into the country. Besides, it has also liberalised the norms for external commercial borrowings.
Moody's said it would also monitor whether the policy changes shift the composition of India's CAD financing in favour of foreign direct investment (FDI), or whether external debt inflows accelerate faster than investment flows.
"If funding for the CAD shifted away from external debt and towards foreign direct investment, the sovereign credit profile would benefit," it said.
It added that inflationary pressures could resurface because of recent fuel price hikes or pick up in food prices.
The WPI inflation in January was at a three year low of 6.62 per cent.
"Higher domestic inflation affects the current account in several ways: it makes exports more expensive, imports cheaper and interest rates higher. Therefore, should high inflation and elevated domestic capital costs decline over 2013, they may benefit the current account," Moody's said.
Moody's has a 'Baa3' rating for India with a stable outlook.
Domestic thrust key to lowering current account deficit: Moody's
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