Focus on FDI to improve external finances, boost rupee: Moody’s

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 vicepresident 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 f ur t her said t he 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 exter- nal 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”.

The net FDI inflows have grown from USD 15.8 billion in first half of 2014-15 to over USD 17 billion in April-September of the current fiscal, hich “is noteworthy against the background of uncertainty in other capital inflows”. The analysis added that the nominal value of the rupee against a basket of currencies has remained steady or strengthened. “The rupee has gone from being one of the worst performing currencies to one of the best-performing against dollar this year,” it said.