Current account deficit a challenge

The Reserve Bank of India said on Thursday country’s current account deficit (CAD) was likely to remain high, on the back of feeble export growth and volatile crude oil prices.

The central bank also pointed out that the financing of CAD would be a challenge. “The financing of CAD will continue to pose a challenge so long as the global situation remains uncertain,” the central bank said in a statement.

Sluggish demand from advanced economies has led to deceleration of exports. Moderation in import growth was less pronounced, RBI said in the mid-quarter policy review released on Thursday.

The central bank expects global growth in 2012 and 2013 to be lower than anticipated because of negative growth in euro area and slowdown in emerging and developing economies (EDEs).

In 2010-11, India had reported current account deficit at 2.7 per cent of gross domestic product (GDP).

The Prime Minister’s Economic Advisory Council has estimated CAD at 3.6 per cent for the current financial year. At the end of the first half of the financial year, India’s CAD was $32.7 billion or 3.6 per cent of GDP.

HSBC’s chief economist for India and ASEAN said the central bank was wary of the CAD situation.

“The explicit mentioning in today’s (Thursday’s) statement of the potential ‘challenge’ of financing the current account deficit suggests RBI is concerned,” said Leif Eskesen of HSBC.

RBI said the European Central Bank’s recent injection of euro 1 trillion into the euro-zone banking system had mitigated the immediate liquidity pressures in financial markets. However, a credible solution to the sovereign debt problem is yet to emerge.

“Sluggish global economic activity, uncertainty in the euro area and rising crude oil prices will hamper growth prospects of EDEs,” said RBI.

High crude oil prices could also pose a risk to India’s current account balance. Prices of crude oil have risen from $110 a barrel to about $125 a barrel since the announcement of the third-quarter policy review in January. RBI said the spike reflected both geopolitical concerns and abundant global liquidity accentuating the risks to growth and leading to inflation.

The volatility in the rupee-dollar exchange rate has reduced since January after RBI took a slew of measures, including market intervention. Since the announcement of the third quarter policy review, rupee has been trading in the range of 48.69-50.58 per dollar.