Morgan Stanley warns India of balance of payment risk

Global investment bank Morgan Stanley has warned that India faces a high risk of stress on the balance of payment front because of the higher crude prices,and the only way to stave off the crisis is to cut subsidies by freeing diesel prices

Written by ENS Economic Bureau | Mumbai | Published: May 4, 2012 12:59 am

Global investment bank Morgan Stanley has warned that India faces a high risk of stress on the balance of payment (BoP) front because of the higher crude prices,and the only way to stave off the crisis is to cut subsidies by freeing diesel prices.

“The risk of balance of payments (BoP) stress remains high,” the US investment bank warned in a note. India will remain exposed to slowdown in capital inflows — which triggers problems on the BoP front — unless the government initiates major policy action to cut its spending (including subsidies) and/or international crude oil prices decline sharply”,it said.

A slowdown in capital inflows will increase the pressure on the exchange rate,which will raise the cost of capital that will,in turn,end up hurting growth further,it warned.

The note further adds that even if the country avoids a shock on BoP by issuance of sovereign dollar bonds or dollar deposits,bringing down the cost of capital will be difficult unless the fiscal policy is tightened.

The current deficit had shot up to an alarming 4.3 per cent in 2011-12 against 2.3 per cent in the previous fiscal on declining capital inflows and rising trade deficit,which had touched $185 billion last fiscal against an export of $303 billion. The last time the country had a major BoP crisis was in 1991,which triggered economic reforms.

India is the only country in the region with a current account deficit,and a wide one at that,given expectations it hit a record high for the year ended in March.

Given the vulnerability on so many domestic fronts,any signs of global risk aversion would particularly hit flows and the rupee,Morgan Stanley said.

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