RBI cautions against higher current account deficit

The Reserve Bank today said the country's widening current account deficit due to a larger import-export gap is a cause for concern and it is difficult to sustain.

"If the current trend persists, Current Account Deficit (CAD) as a percentage of GDP will be significantly higher than in the previous year," RBI Governor D Subbarao said in the second quarterly monetary policy of the central bank.

Current account deficit is the gap between the amount the country pays to external world against what it receives from abroad, barring capital movement. It was around 3.6 per cent of GDP in the first quarter of 2010-11.

Subbarao said it is generally perceived that a CAD above 3 per cent of GDP is "difficult to sustain over the medium-term".

The trade deficit arising out of higher imports than exports during April-September of the current fiscal was $62.83 billion against about $48 billion in the same period last year.

Net invisibles as per the latest data up to first quarter of this fiscal available with of RBI were $20.5 billion against $21.2 billion in April-June 2009-10.

The net invisible receipts, which are surpluses of receipts over payments for invisibles like services trade were about $79 billion in 2009-10, declining from about $90 billion in the previous year.

RBI said the continuing sluggishness of the global economy led to some moderation in exports growth and invisible receipts, while import growth accelerated due to the strong domestic recovery.

"The challenge, therefore, is to rein in the deficit over the medium-term and finance it in the short-term. The medium-term task has to receive policy focus from both the Government and the Reserve Bank," Subbarao said.

He said the short-term task is to see that the current account is fully financed while ensuring that capital flows are not far out of line with the economy's absorptive capacity and that the component of long-term and stable flows in the overall capital flows is high.