RBI says financing CAD key challenge as inflows turn volatile

Cautioning of large scale capital outflows that could make economy vulnerable to "stops and reversals", RBI today said financing CAD, which touched record high of 4.8 per cent of GDP in 2012-13, is a big challenge.
On a positive note, the central bank said the growth outlook for the current fiscal is relatively optimistic, though it termed slowdown in growth as the most worrisome factor.
RBI in its half-yearly Financial Stability Report said, "There is risk that the capital flows could reverse on a large scale if the risk-off sentiment intensifies causing increased volatility in the domestic markets ... And volatile capital flows have made the country vulnerable to 'stops and reversals'."

"In addition to the magnitude of flows needed to finance the CAD, the composition of flows, particularly dependence on portfolio and short-term debt flows represent an added source of concern," the report released today said.
Earlier in the day, RBI said CAD hit a record high 4.8 per cent of GDP in FY13, fuelled by rising imports of oil and gold, but it was lower than expectations.
Significantly, for the March quarter of the past fiscal, CAD improved massively to settle at 3.6 per cent, steeply down from 6.7 per cent in the previous quarter.

On the volatile capital flows, the report said they are making the country "vulnerable to sudden stops and reversals" and that this trend was seen recently following the "slightest hint of exit from quantitative easing by the US Federal Reserve".

Foreign investors have sold a net USD 7 billion in domestic debt and equities in June, pulling down the rupee to a record low of 60.72 to the dollar yesterday.
The RBI report said external sector vulnerability indicators have shown a worsening trend and that high gold imports and external debt are sources of greater concern.
"The macroeconomic risks to the economy have increased over the past six months, mainly on the dimensions of domestic growth, external sector and corporate sector performance," the central bank said in its half-yearly Financial Stability Report, released this evening.