Current A/C Deficit Seen At 2% Of Gdp

The Reserve Bank of India (RBI) has estimated India's current account deficit (CAD) at around two per cent of the gross domestic product (GDP) for 1998-99 against 1.75 per cent last year in the backdrop of a weakening trade balance, a senior central bank official said yesterday in a speech in Tirupati.

He further added that the RBI would resort to temporary monetisation of the government's borrowing programme to keep pressure of the interest rates.

"In spite of a possible increase in trade deficit over the previous year, we expect the CAD to be about two per cent of GDP only and such a deficit could be met by anticipated net capital flows," said Y V Reddy, deputy governor of the RBI.

He said the weakening world trade scenario had affected Indian exports and the situation was not expected to immediately improve. "The forecast of growth in world trade volume in 1998 does not give a very encouraging picture for a substantial pick up in exports.

World trade volume is estimated to grow by 6.7 per cent in 1998, as compared with 9.6 per cent in 1997," Reddy said. He said sanctions could disrupt external assistance to India.

Analysis shows that only 2 per cent of sanctions during a year fructified into disbursements in the same year since most of the assistance was in the form of project finance with a disbursal profile of about 4 to 7 years.

"In any case, with diplomatic and other efforts, even over the medium term, it is inconceivable that rigorous sanctions would continue for long. Overall, during the current year, net external assistance should be about the same level as last year," he said.

He said foreign direct investment (FDI) flows would continue to grow as several projects were under implementation or at advanced stages. But, he added net foreign institutional investor flows may remain negative till January. "A deceleration during 1998-99 on this account need not be ruled out," Reddy said.

He said the government was able to keep pressures off domestic interest rates by tilting towards monetisation of its borrowing programme.

The government has completed around 72 per cent of its gross borrowing programme of Rs 79.376 crore. He said strong accretions in bank deposits would keep pressure off interest rates even if credit demand picks up in the busy season.

He said while bank credit appeared slow the increase was 13.7 per cent as against 12.1 per cent in the previous year, the deceleration in the growth of non-food credit was explained by a drastic reduction in advances to the oil sector, especially, IOC. The reduction in oil credit was a little over Rs.2,100 crore the current financial year up to July 31, as against Rs 675 crore in the previous year, which may be explained by the settlement of the oil pool deficit, he said.