Describing India’s focus on foreign direct investment (FDI) as “credit positive”, Moody’s Investors Service on Sunday said improvement in the external situation will also provide support to the rupee.
“If recent changes in the policy successfully shift the composition of foreign capital inflows towards FDI, it would lower capital account volatility, a credit positive,” said Rahul Ghosh, senior vice-president and research analyst, Moody’s
The government last month significantly liberalised FDI regime, putting most of the sectors on the automatic route. As much as 90% of in-bound FDI comes through the automatic route according to official estimates.
Ghosh further said the improvement in India’s external accounts in recent quarters, coupled with the country’s growth outperformance against major emerging markets, should provide a measure of support to capital inflows and, by extension, the rupee.
In the past “these (external flows) were skewed somewhat towards portfolio investment, raising balance of payments risks from reversals in investor sentiment,” he added
In the Mid-Year Economic Analysis 2015-16, tabled in Parliament on December 18, the government said India’s external position “appears robust”, with the current account deficit (CAD) at a comfortable 1.2% of GDP. It also said that foreign exchange reserves have risen to $352.1 billion (as on December 4), which “seem ample”.