US ratings agency Moody’s Investors Services has warned that a continued rise in India’s current account deficit and external debt could increase its vulnerability to international financial volatility.
India’s current account deficit, which averaged less than 1% of gross domestic product (GDP) in the first half of the previous decade, has steadily worsened in the last few years, hitting a recent peak of 5.3% of GDP in the quarter ending September 2012.
According to a recent report by Moody’s, “Credit Implications of India's Current Account Deterioration”, India's domestic policies partly explain why its current account deficit has exceeded that of many similarly-rated peer nationss that operate in the same global environment, even ones similarly reliant on energy imports.
A widening CAD — the difference between export earnings and import expenses net of cash payments and remittances — is a worrying sign for a slowing economy where fulfilling immediate dollar payment obligations may necessitate dipping into foreign exchange reserves.
“This rise in the current account deficit has largely been funded by foreign currency debt. However, should current balance of payments trends persist, (India’s) external liquidity position will eventually weaken,” the Moody’s report said.