Describing high Current Account Deficit (CAD) as the biggest risk to Indian economy, the RBI on Friday said any further deterioration of CAD could result in its policy reversal stance.
“The biggest risk to the economy stems from the CAD which, last year, was historically the highest...Monetary policy will also have to remain alert to the risks on the account of the CAD and its financing, which could warrant a swift reversal of the policy stance.”
CAD, which is the difference between the inflow and outflow of foreign currency, had touched a record high of 6.7 per cent in the December quarter of last fiscal year. The CAD in 2012-13 fiscal is likely to be around 5 per cent of the GDP.
Elaborating further, the RBI said, “the outlook for Advanced Economies (AEs) remains uncertain, and even if there may be no event shocks, there could well be process shocks which could result in capital outflows from Emerging Developing Economies (EDEs)”.
It said even as the large CAD is a risk by itself, its financing exposes the economy to the risk of sudden stop and reversal of capital flows, should global liquidity rapidly tighten.
“Further, with quantitative easing (QE), AE central banks are in uncharted territory with considerable uncertainty about the trajectory of recovery and the calibration of QE.
Should global liquidity conditions rapidly tighten, India could potentially face a problem of sudden stop and reversal of capital flows, jeopardising our macro-financial stability.
The apex bank also noted that a large CAD, appreciably above the sustainable level, year after year, will put pressure on servicing of external liabilities.
It said sustained revival of growth is not possible without a revival of investment.
On Thursday, the apex bank in its Macroconomic and Monetary Developments Report 2012-13 had said the CAD in FY14 was likely to benefit from the moderation in global commodity prices.
Gold prices had fallen to a 21 month low at Rs 26,440 per 10 grams in the domestic markets on April 16 due to continued sell-off in the global markets.
Though there have been some recovery in gold prices in the spot as well as futures market, uncertainty looms large over the way prices would move, going forward.
Gold prices had touched all-time high of Rs 32,975 per 10 gm on November 27, 2012.
The apex bank had also expressed concern over rising external debt and short-term borrowings to meet the widening CAD.
“Short-term debt on a residual maturity basis increased to 44 per cent of total debt and 56 per cent of the foreign exchange reserves by end-December 2012,” it had said.