Credit rating agency Moody's Investors Service has said that India's rising foreign direct investment (FDI) inflows reduces current account deficit and also the external financing needs.
In a statement on Thursday, Moody's said it does not expect widening of India's current account deficit based on its assumptions that commondity prices will remain low in 2016 and 2017.
According to agency, FDI inflows are expected to grow due to Centre’s measures like liberalisation of foreign investment limits and 'Make in India' initiative.
"These trends are credit positive, as they lower India's susceptibility to external shocks at a time when capital flows to emerging markets are volatile and weak economic conditions globally, particularly in the Gulf states, may dampen remittances," said the Moody's statement, quoting Marie Diron, senior vice president for the Sovereign Risk Group.
According to Moody's, a lower energy import bill and policy measures to contain gold imports are contributing to keeping the trade deficit at moderate levels.
Going forward, the announcement in the latest budget of the imposition of an excise tax on gold is likely to dampen overall gold imports.
Additionally, the value of oil imports decreased by 37.5 percent - or Rs. three trillion (US$44.3 billion) - in the 12 months to February 2016 compared with the previous year, despite a 10 percent increase in the volume of petroleum imports, Moody's said.
But, the prospect of subdued global economic activity – particularly in Gulf states where more than half of remittances to India originate - may lead to a significant and prolonged weakening of remittance inflows.
This development is likely to prevent India's current account from returning to balance and could lead to its renewed widening.
The rapid rise in FDI inflows mitigates the risks related to a possible widening of the current account deficit from weaker remittances by diminishing India's external financing needs from other inflows in the form of credit and equity inflows.
Net FDI inflows into India hit an all-time high in January 2016, at $3 billion on a 12-month moving average basis.
India's current account deficit is now more than covered by its FDI inflows. The rise in FDI points to stronger investor interest in India on the back of robust economic growth.