Financing it through volatile flows is a concern: Subbarao

The Reserve Bank of India Governor D. Subbarao, on Monday, warned the country against widening Current Account Deficit (CAD), which is expected to be higher than last year.

“Today, the external sector is vulnerable. Last year, the CAD was 4.2 per cent of gross domestic product (GDP). This year, in 2012-13, we expect the CAD to be significantly higher than that, historically, the highest CAD measured as a proportion of the GDP,” said Dr. Subbarao while speaking at the convocation of Indira Gandhi Institute of Development Research (IGIDR), here.

At present, the CAD is at 5.3 per cent of GDP in the second quarter of the current financial year.

In his review of third quarter policy in January-end, Dr. Subbarao had highlighted the issue of widening CAD, which would disturb policy actions.

Rupee has depreciated by about 20 per cent in the last two years. “We expect the rupee depreciation to be a natural counter-force to increasing CAD, but we have the rupee depreciating and still CAD is high.”

“We would not worry so much if the CAD is high … if it was due to import of capital goods … but because of import of oil and gold.”

The other concern is that the way India is financing the CAD which is increasingly through volatile flows instead of getting much of foreign direct investment (FDI).

On reducing the rate in the last policy review, Dr. Subbarao said that “the dilemma we faced in making our monetary policy in the context of the CAD was that we reduced rates at a time when CAD was so high because one would expect that if the CAD is going to go up, the central bank would keep a tight policy. On the other hand RBI reduced rates.”

The RBI Governor said that the country was dismayed by the growth number put out by the CSO (5 per cent advanced estimate) as it was the lowest in the last decade. Growth was slow because consumption had fallen, net exports had fallen, and, most importantly, investments had declined.

“This is a matter of concern because today’s investment is tomorrow’s production capacity. So, if investments are not taking place today, then our growth potential on the way forward is going to be hurt.”

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