Idiosyncratic factors have also contributed, such as the widening of the trade deficit in July 2018 to its largest gap since May 2013. Net portfolio outflows through mid-August have totalled $5.5 billion for the year, mostly in bonds, compared with inflows of $27.9 billion over the same period in 2017.
Foreign direct investment inflows have also weakened and no longer cover the current account deficit. In other words, India's basic balance has turned negative. However, India's vulnerability to currency risk and capital outflows is unlikely to translate into significant pressure on the sovereign credit profile or pose external financing risks.
The current account deficit has widened as global oil prices have risen, but at 1.9 per cent of Gross Domestic Product (GDP) in the quarter ended March 2018, up from 1.6 per cent in 2017. It is still well below the five per cent of GDP recorded around the time of the 2013 Taper Tantrum.
“We expect the full-year current account deficit to remain below three per cent of GDP in the fiscal year ending March 2019. Foreign-exchange reserves have declined by $24 billion since mid-April 2018, but still cover 7.2 months of current account payments, compared with the 'BBB' median of 6.6 months. This provides a buffer should the Reserve Bank of India (RBI) feel it necessary to intervene on a larger scale.
India also has relatively low foreign-currency debt. Only around seven per cent of government debt is denominated in foreign currency (BBB median: 38 per cent). The total foreign-currency external debt, including the private sector, is equivalent to just 13 per cent of GDP, which is one of the lowest among major emerging markets.
Meanwhile, the risk of currency pressures triggering a sudden spike in domestic borrowing costs is mitigated by the RBI's relatively narrow focus on its inflation objective, as opposed to countering external pressures, Fitch added.