India's external sector position in 2018 was broadly in line with the level implied by fundamentals and desirable policies, the International Monetary Fund (IMF), noted in its latest External Sector Report. India's low per capita income, favorable growth prospects, demographic trends, and development needs justify running current account (CA) deficits. External vulnerabilities remain, as highlighted by bouts of turbulence in 2018. India's economic risks stem from volatility in global financial conditions and an oil price surge, as well as a retreat from cross-border integration. Progress has been made on FDI liberalization, whereas portfolio flows remain controlled. India's trade barriers remain significant.
The IMF noted that whereas the external position is broadly in line with fundamentals, measures to rein in fiscal deficits should be accompanied by efforts to enhance credit provision through faster cleanup of bank and corporate balance sheets and strengthening the governance of public banks. Improving the business climate, easing domestic supply bottlenecks, and liberalizing trade and investment will be important to help attract FDI, improve the CA financing mix, and contain external vulnerabilities. Gradual liberalization of portfolio flows should be considered, while monitoring risks of portfolio flows' reversals. Exchange rate flexibility should remain the main shock absorber, with intervention limited to addressing disorderly market conditions.
India's CA deficit grew to $68 billion in 2018-19 from $49 billion the previous year while India's Net International Investment Position marginally improved with the deficit coming down from $438 billion in 2017-18 to $431 billion in 2018-19. India's overall international reserves, though stood at $411.9 billion at the end of March this year, down from March last year by $12.5 billion, IMF noted.
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