Need to encourage equity flows, widening CAD a worry: RBI

Policy reform is needed to improve India's investment climate so that dependence on debt flows is reduced and equity flows are encouraged, the Reserve Bank of India (RBI) today said, adding that the widening current account deficit has resulted in exchange rate pressure and inhibits fiscal spending.

"Going forward, there is a need to reduce dependence on debt flows by encouraging renewed equity flows through acceleration of policy reforms aimed at improving the investment climate," the RBI said in its Macroeconomic and Monetary Developments Review.

It also said financing of the increasing Current Account Deficit (CAD) has resulted in exchange rate pressure. "With a widening CAD, larger fiscal spending could affect growth and stability in the economy," the RBI said.

CAD occurs when a country's total imports of goods, services and transfers is greater than the country's total export of goods, services and transfers.

India's current account deficit swelled to $14.1 billion in the first quarter of the fiscal (April-June), nearly three times the previous quarter's figure.

Foreign funds have invested over Rs 16,790 crore in debt in January this year, compared to over Rs 7,000 crore in equities so far.

The RBI said that a new challenge has emerged in the form of rupee depreciation and since global economic worries are likely to persist, there is a need for prudent policy approach.

"As expectations of quick and robust resolutions to the European sovereign debt crisis diminish, it is all the more important for India to maintain adequate capacity to withstand further external shocks," the RBI said.

The rupee fell to an all-time low of Rs 54.30 per US dollar on December 15 and has lost 16 per cent in 2011. It closed at Rs 50.09/10 per US dollar today.