India to grow at 7% in FY15, CAD to remain low: Moody’s

New Delhi: Moody’s Investors Service today said India’s current account deficit is likely to remain low supported by declining oil prices but a slow recovery in industrial output and investment would drag economic growth to 7 per cent in the current fiscal.

Moody’s also lowered growth forecasts for many Asia Pacific (APAC) sovereigns, citing that subdued global growth, exacerbated by weaker demand from China. “We have also reduced our projections for India to 7 percent in 2015 and 7.5 per cent in 2016, from 7.5 per cent and 7.6 per cent based on high frequency indicators suggesting that the recovery in industrial output and investment is slow, and bank credit growth still subdued,” it said.

India’s economy grew at 7 per cent in the June quarter of the current fiscal. The government expects economy to grow at 8-8.5 per cent in the fiscal ending March 2016. It said for a number of economies in the region, the fall in oil prices has helped to reduce current account deficits. Moody’s said India’s current account deficit (CAD) has narrowed significantly from 4.8 per cent in 2012 to 1.4 per cent in 2014. “We expect this trend to continue, supported by lower oil import costs.”

CAD is the difference between the inflow and outflow of foreign exchange. Oil prices have slumped by nearly 60 per cent over the past one year to around USD 45-46 per barrel, easing pressure on India’s huge oil import bill. “The risk of a weaker monsoon and potential for higher food price inflation narrowed the scope for more significant monetary easing in the first half of the year. Nonetheless, our expectation is that despite its slower than anticipated pace, the direction of recovery is positive, which is reflected in our 2016 forecast,” Moody’s said.

The RBI has lowered interest rates by 0.75 per cent in three tranches so far in 2015, but industry has been demanding more rate cuts in view of declining inflation and slow growth. In its report ‘Asia Pacific Sovereigns: Credit Profiles Resilient to Slowing Exports, Subdued Domestic Demand’, Moody’s said weak demand from China has dampened the export outlook for the region, while softer commodity prices weigh on some sovereigns’ export revenues, growth and fiscal balances.

Moody’s said low APAC growth forecasts for this year and next illustrates a weaker outlook in the region and in other parts of the world. “Our 2016 forecast for China is a shade lower at 6.3 per cent, down from 6.5 per cent. But the slowing is most marked elsewhere in emerging Asia. We now see APAC excluding China, India and Japan growing 3 per cent this year and 3.2 per cent next, down from our forecasts of 3.6 per cent and 4 per cent,” it said. It said lower growth is negative, but sovereign credit quality remains intact and on average, it is still stronger than in most other regions and the risk of deflation is minimal.

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