Reserve Bank of India Governor Raghuram Rajan, on Wednesday, said curbs on gold import would incentivise smuggling of the yellow metal.

“I would have been happier if we had the current account deficit (CAD) that we have without significant curbs on anything, including gold. I think that is our aim. I think, we should aim to have a sustainable CAD without any distortions, like removing incentives for smuggling of gold [the 10 per cent import duty on the yellow metal has led to a spike in gold smuggling],” said Dr. Rajan.

He was addressing a press conference to announce the RBI’s third mid-quarter review of monetary policy.

Lower CAD

“We are certainly focussed on the external environment. CAD is significantly lower. We have shown the ability to raise money when we need,” said Dr. Rajan. Between September and November-end, the country received $34 billion through bank capital and FCNR deposits.

“If you look at FII flows, since April 1, on net they are negative $2 billion. The equity inflows have offset the debt outflows by a considerable margin. If you look at debt, there were outflows till about late November. Early December, we started seeing inflows once again. All this suggests that we are in a better situation.”

Supply side constraints

Dr. Rajan said growth was below its potential even now. The effect of the negative output gap (this occurs when actual output is less than full capacity output) should be seen in the inflation numbers. If not seen, “we have to query our assumptions.”

“My discussions with government officials suggest that they are very firm on achieving it (fiscal deficit target). That will mean, given where we are, there will be a certain amount of expenditure reduction in the fourth quarter. That will have some adverse growth effect, of course. We expect expenditure reduction in the fourth quarter. My reading is there is always a certain amount of rollover,” the Governor said.

More In: Economy | Business