Boost private investment, curb inflation to contain Current Account Deficit: Moody's

It added that inflationary pressures could resurface because of recent fuel price hikes or pick up in food prices.

The WPI inflation in January was at a three year low of 6.62 per cent.

"Higher domestic inflation affects the current account in several ways: it makes exports more expensive, imports cheaper and interest rates higher. Therefore, should high inflation and elevated domestic capital costs decline over 2013, they may benefit the current account," Moody's said.

Moody's has a 'Baa3' rating for India with a stable outlook.

Domestic thrust key to lowering current account deficit: Moody's

(Reuters) India will have to pursue domestic policy initiatives to help achieve any near-term improvement in its current account deficit as global growth may only be slightly better in 2013 and commodity prices are unlikely to ease sharply, Moody's Investor Service said.

While recent government moves to cut subsidies and woo foreign investment would help narrow the external deficit, these policies need to be persisted for any significant success, it said in a note dated February 14, issued just two weeks before India's annual budget on February 28.

India posted its second highest ever monthly trade deficit of $20 billion in January as imports surged to record highs, piling pressure on a widening current account deficit and limiting scope for the central bank to cut interest rates for an economy expanding at its slowest pace in a decade.

The current account deficit hit an all-time high of 5.4 percent of gross domestic product in July-September due to slowing exports and heavy oil and gold imports. The gap is expected to widen further in the subsequent quarter, data for which is due in March.

Moody's said it would be watching the assumptions underlying India's budget deficit target for the new fiscal year that begins on April 1, as well as the expenditure and revenue policies announced in order to meet that goal.

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