Describing India’s focus on FDI as “credit positive”, Moody’s Investors Service said the 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 foreign direct investment, it would lower capital account volatility, a credit positive,” Moody’s Investors Service VP (Senior Research Analyst) Rahul Ghosh said.
The government has last month significantly liberalised the foreign direct investment (FDI) regime, putting most of the sectors on the automatic route.
According to officials, as much as 90 per cent of inbound FDI comes through the automatic route.
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, Ghosh said “these (external flows) were skewed somewhat towards portfolio investment, raising balance of payments risks from reversals in investor sentiment”.
The government, in the mid-year economic analysis 2015-16, said India’s external position “appears robust”, with the current account deficit (CAD) at a comfortable 1.2 per cent of GDP.
It further said foreign exchange reserves have risen to USD 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, which “is note-worthy 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 the dollar this year,” it said.