External position manageable and reserves adequate, says RBI

'CAD will stay less than 3% of GDP during the current fiscal'

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With Current Account Deficit (CAD) falling and having built foreign exchange reserves through various steps, the Reserve bank of India (RBI) believes that the country's external position appears to be manageable and reserves are adequate. “Fall in gold imports during second quarter of the fiscal 2013-14 augers well for the current account balance. If gold is excluded from the import basket, it improves the import coverage ratio of reserves. On balance, India's external position appears to be manageable and reserves seem adequate,” said RBI in its Financial Stability Report released on Monday.

 

The CAD for the second quarter of the current fiscal ending September 30 declined to $5.2 billion, or 1.2 per cent of Gross Domestic Product (GDP) as compared with $21 billion recorded in the corresponding quarter of last year.

 

RBI continues to believe that the CAD is expected to be less than 3 per cent of GDP during the current fiscal. “The increased resilience of India financial markets is evidenced by the positive reaction to the announcement of the commencement of tapering from January 2014 by the Fed,” said RBI in the report.

 

The US Fed said earlier this month that it would start to taper its aggressive bond-buying program to $75 billion a month beginning in January. But this had little impact on the rupee against the dollar. Since the announcement in the intervening night of December 18-19, the rupee had appreciated by 26 paise to close at Rs 61.85 per dollar on Friday.

 

According to RBI, while attracting capital flows to tide over CAD appears attractive, the long term solution to India's external problems lies in increasing productivity and export competitiveness.

 

RBI data shows that foreign exchange reserves fell in the week ending December 20 by $ 12.6 million to $ 295.50 billion. But experts see the reserves position comfortable. Through the swap windows for Foreign Currency Non-Resident (Banks) or FCNR (B) funds and banks' overseas borrowings, RBI has mobilised $ 34 billion earlier this year.

 

But RBI agrees that boosting exports in an environment of low global growth could be challenging, the report said