India's large fiscal and current account deficits have impacted market confidence, the IMF has said emphasing that the rupee decline posed both challenges and opportunities for the country.
'The current situation presents a challenge, obviously, to the government of India, but also an opportunity for the government to continue with its policy efforts on a variety of fronts,' International Monetary Fund (IMF) spokesman Gerry Rice said.
Rice said the combination of large fiscal deficit and Current Account Deficit (CAD), reliance on portfolio inflows, among other things, have affected market confidence.
'But may be just stepping back on the situation in India, the combination of large fiscal and CAD, high and persistent inflation, sizable unhedged corporate foreign borrowing and reliance on portfolio inflows are longstanding vulnerabilities that have now been elevated as global liquidity conditions tighten, and this clearly has affected market confidence,' Rice said in response to a question.
The Indian economy is battling depreciating rupee and low investor confidence. The currency has dropped over 23 per cent since April and had touched a low of 68.80 to a dollar earlier this week.
The CAD, which is the difference between the inflow and outflow of foreign exchange, scaled to a record high level of USD 88.2 billion or 4.8 per cent of GDP in 2012-13. The government expects to bring it down to USD 70 billion this year.
With various fiscal tightening measures, the government was able to restrict fiscal deficit to 4.9 per cent of GDP in 2012-13.
To a query on the possibility of India selling its gold reserves to the IMF to prop up its currency, Rice said: 'I wouldn't want to speculate on any support or programme needs'.