CAD to widen in Q1, improve thereafter: RBI

Fluid markets may make Overseas borrowing costly for India Inc

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India’s current account deficit (CAD) for the quarter ended June could widen, owing to the adverse trade environment. However, steps such as curbs on gold import and fuel price rises might improve the situation subsequently, the Reserve Bank of India (RBI) has said.

After sharp increases in the first two months of this financial year, the country’s trade deficit narrowed considerably in June and July.

To improve the country’s trade balance, there might be scope for curbing non-essential imports as well. In 2013-14, CAD was expected to be lower than the historic high recorded in 2012-13, RBI said in its annual report for 2012-13.

The CAD might continue to be much above the sustainable level (estimated at 2.5 per cent of gross domestic product). This highlighted the importance to improve export competitiveness, discourage avoidable imports and improve more stable capital inflows, RBI said. It pointed to the need to preserve financial stability, amid the possibility of an increase in asset quality risks. Through this year and the next, the priority should be containing financial stability risks arising from banks’ deteriorating asset quality, RBI said.

The central bank also flagged risks from volatile market conditions. Given the fluid situation in the currency, equity, bond and commodity markets, the external finance premium could impact access to finance, RBI added.

These effects could be magnified, as a change in collateral valuations could weaken the ability of companies to borrow, RBI said, adding conventional interest rate effects could propagate, with balance sheet effects being transmitted. Therefore, it was important for companies to use appropriate strategies to mitigate these risks by hedging these as far as possible, it said.