Moody’s Investors Service today said domestic factors and government policies will largely decide the course of capital flows in the country and the future economic growth, even as the impending US Fed rate hike may dampen investor sentiment.
“The answer lies in the extent to which the government policies can animate domestic sources of growth and maintain financial stability. Domestic factors will be the key determinants of the broad direction of capital flows into and out of these countries in 2016 in particular whether their respective policies appear likely to revive growth,” it said.
“Although markets may have largely discounted US monetary tightening and slower growth in China,… India may still see investor demand weaken whenever unfavourable data are released or even when anticipated global events, such as a rate hike by the US Federal Reserve, occur,” the agency said in a report.
Moody’s said the India’s depreciating currency illustrated the impact of weaker global growth and tighter financing conditions.
The US Federal Reserve is likely to hike rates in the week.
The rating agency said it has maintained positive outlook through a period of external challenges because authorities in India are making progress in addressing long-term constraints on their respective credit profiles.
“In India, the focus is on greater control over inflation and improving the operating environment for private investment,” it said.
Moody’s said India’s credit profiles have strengthened since the late nineties. Robust global growth and low interest rates facilitated credit improvements.
“But the external environment is now less supportive, so sovereign credit trends will hinge on whether governments can animate domestic sources of growth without increasing financial risks,” it said.
Moody’s said India’s reserves have increased over the past year due to the country’s balance of payments surpluses.