India may be narrowing its current account deficit but it still faces the risk of significant pressures from the expected tapering of the United States Federal Reserve’s stimulus programme, Fitch Ratings says.
“A combination of measures to curb the import of gold, a weaker exchange rate and softer demand is narrowing the current account deficit,” the credit ratings agency said in a report.
The current account is a measure of a nation’s finances that combines the balance of trade, cash transfers and payments to investors.
Fitch forecasts that India’s current account deficit will decline to 3.1 per cent of GDP in the current financial year, compared to 4.8 per cent last year.
“This fall, however, will not be enough to shield India from further pressures related to the eventual commencement of Fed tapering,” it added.
Expectations of tapering in the US earlier this year led to investors pulling out funds from emerging market and played a major role in the rupee’s decline to record lows over the summer.
“The sharp depreciation of the rupee indicates that India’s economy is still in the middle of a difficult adjustment process,” said Fitch. “India was not the only large emerging market with a significant current account deficit to face heavy capital outflows as prospects over imminent Fed tapering grew, although the associated effects of a weaker exchange rate have placed the economy under more pressure.”
Fitch however said that the “spill-over effects of a significantly weaker rupee have not hurt India’s sovereign creditworthiness”.
Agriculture and exports had remained resilient and were helping to “cushion the economy”, it added.
But the country’s “modest economic recovery” was likely to continue to hurt the banking sector, “which is facing a combination of weakening asset quality, eroding profit and declining capital”.
Fitch’s sovereign rating for India is BBB-, the lowest investment grade rating. In June, it revised its outlook for India to “stable” from “negative”.