Moody?s cautions India of negative credit outlook

Updated: Mon, Feb 18 2013. 09 55 AM IST

New Delhi: Rating agency Moody?s on Monday cautioned the Indian government of a negative credit outlook, and said the country?s rising merchandise trade deficit which widened to $20 billion in January, is raising its external vulnerability.

Moody?s, unlike Standard and Poor?s and Fitch Ratings, has so far maintained a stable outlook for India?s sovereign rating.

Data released by the commerce ministry last week showed that India?s exports grew for the first time in nine months in January, while imports touched a record high of $45.6 billion. India?s current account deficit has touched a new high in September at 5.4% of gross domestic product (GDP) due to slowing exports and heavy oil and gold imports.

Moody?s, in its credit outlook said India?s monthly average trade deficit has risen to $13.5 billion in 2011 to $16 billion in 2012 up from an average of $9.5 billion a month between 2008 and 2010.

?These rising deficits are being financed by increased foreign-currency borrowing, raising India?s vulnerability to international financial volatility. Wider trade deficits can also weaken the currency, raising domestic prices of imported commodities, further fuelling India?s already high inflation rate,? it said.

Calling for tighter fiscal policy, Moody?s said that slowing global economic growth, rising prices of oil and gold and loose fiscal policy which stimulates domestic demand are the reasons for India?s widening trade and current account deficit.

?Loose fiscal policy also fuels domestic inflation, which erodes the competitiveness of both export and import-competing sectors, further widening the trade gap. Trends in the first two factors are unlikely to turn significantly benign in 2013. Therefore, an improvement in India?s trade balance will require a shift to policies to enhance domestic competitiveness,? it said.

Source: http://www.livemint.com/Politics/3SKTDI9Tsz8ST0bOStTcoM/Moodys-cautions-India-of-negative-credit-outlook.html

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