Reserve Bank Governor Duvvuri Subbarao on Monday cautioned the country was headed for the highest ever current account deficit this fiscal, after it rose to 5.3 per cent of GDP in the second quarter.
“Last year, CAD was 4.2 per cent of GDP, but this year we expect it would be significantly higher than that. It’s going to be historically the highest CAD measured as a proportion of GDP,” the Governor said, though he refrained from giving any figure.
He also expressed concern over the way the CAD, which is the gap between forex gained and forex spent, is being financed by volatile inflows instead of more foreign direct investments.
Mr. Subbarao was addressing the convocation ceremony of the RBI-set up Indira Gandhi Institute of Development Research (IGIDR) here.
The trade gap is widening mainly because of higher import of oil and gold. The third quarter numbers are expected later this week.
Flagging his concerns over CAD, which was the overriding theme of the third quarter monetary policy announced on January 29, Mr. Subbarao said these were regarding its level, quality and the way it is being financed.
“We would not worry if the widening CAS is on account of import of capital goods, but here it is high on account of import of oil and gold.
“The other concern is the way we are financing it. We are financing our CAD through increasingly volatile flows.
Instead, we should ideally be getting as much of FDI as possible to finance the CAD. On the other hand, what we are getting is a lot of volatile flows to finance it,” Mr. Subbarao said.
In FY12, after hitting a high CAD of 4.3 per cent, which was then a record, CAD had declined to 3.9 per cent of GDP, though it was 10 bps above the year ago period.
Keywords: current account deficit, Subbarao
RBI has had a uphill task at hand. On one hand it is being criticized
for its rigit stand in monetary policy on the other hand it finds too
difficult to manage growth and inflation together. Mr Subbarav would
have imagined the gravity of the situation after swearing in as
governor.
There are various factors for this slump in economy. Some are internal
and other are global. As RBI reiterates the concern over the high CAD
which is determined by the forex flow. If import is higher than
export, it results in high CAD. The ideal CAD has to be 3% of GDP
which we have not been able to maintain and here lies the problem.
Since we have been a kind of parasite in terms of importing oil and
gold resulting in high import bills. If i talk of export then the
depreciating rupee had added fuel to fire resulting in high CAD. Low
investment, low consumption, supply side constrain have been hampering
the growth. Inflation has dissuaded RBI from lowering the repo and CRR
rates further.
As mentioned CAD is increasing day by day just because of increase in import of Gold and Oil and to balance this increase there is need of FDI and not volatile inflows...
So what about surety that FDI will not become volatile in long run...
And to decrease the import of Oil the government must invest in strengthening public transport system.
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