Don't be complacent about current account deficit: RBI

The central bank says the CAD in FY14 is likely to benefit from the moderation in global commodity prices

The Reserve Bank of India (RBI) today said the fall in oil and gold prices might provide only temporary relief to the country’s rising current account deficit (CAD) and the risks to the external sector remained high.

A day before of its annual policy for 2013-14, the central bank said the CAD in FY14 was likely to benefit from the moderation in global commodity prices. Yet, the sustainability of this process continued to face risks from event shocks that could cause a sudden stop or reversal of capital inflows. There is hardly any space for complacency, RBI said in its ‘Macro-economic and monetary developments report 2012-13’.

The modest pick-up in exports in the fourth quarter (January-March) of 2012-13 and some deceleration in imports might help reduce the CAD in Q4, after a record high of 6.7 per cent of gross domestic product (GDP) in Q3.  Despite the relief, the CAD as a percentage of GDP for FY13 was expected to be around five per cent, twice the sustainable level.

The high CAD in Q3 of 2012-13 was adequately financed by capital inflows, without any reserves’ depletion. The reduced pressure on the trade deficit, coupled with higher capital flows, were likely to facilitate smooth financing of the CAD. Yet, said RBI, several risks remained, requiring policy attention.

First, the moderation in CAD might not be sufficient to bring it down to a sustainable level. Second, there are other impediments to CAD reduction. Exports, for instance, need to build on productivity-based competitiveness and infrastructure bottlenecks should be addressed. It would be erroneous to take comfort from factors that are exogenous in nature, such as the fall in oil and gold prices, without addressing domestic structural problems, RBI added.

Third, though foreign institutional investor flows remain strong at the moment, these could become volatile if global financial conditions turn adverse. Fourth, the global economic outlook is far from rosy and downside risks remain substantial.

Thus, sustaining export recovery in such an uncertain situation would be a challenge that needs domestic efforts to raise productivity-based competitiveness.