The Reserve Bank of India (RBI), on Tuesday, said that the reduction in the current account deficit (CAD) resulting from the sharp decline in oil prices had begun to reverse.
However, it said that the size of the deficit was expected to be contained to about 1.5 per cent of GDP (gross domestic product) this year.
Net exports were, therefore, unlikely to contribute as much to growth going forward as they did in the past financial year, said RBI Governor Raghuram Rajan, at a press conference here while announcing the second bi-monthly monetary policy.
Consequently, growth would depend more on a strengthening of domestic final demand.
“With low domestic capacity utilisation, still mixed indicators of recovery, and subdued investment and credit growth, there is a case for a cut in the policy rate today,” said Dr. Rajan while announcing a cut of 25 basis points in repo rate.
Repo rate is the rate at which RBI lends money to banks.
While portfolio and direct foreign investment flows were buoyant during 2014-15 with net foreign direct investment to India at $36.6 billion and net portfolio inflows at$41 billion, “the year 2015-16 has begun with net portfolio outflows in the wake of a reduction in global portfolio allocations to India,” the Governor said.
However, he said that foreign exchange reserves were around $350 billion, providing a strong second line of defence to good macro-economic policies if external markets turned significantly volatile.
He also said that assuming reasonable food management, inflation was expected to be pulled down by base effects till August but could start rising thereafter to about 6 per cent by January 2016 — slightly higher than the projections in April.
He also said that the projection for output growth for 2015-16 had been marked down from 7.8 per cent in April to 7.6 per cent with a downward bias to reflect the uncertainties surrounding these various risks.
POINTERS:
1. Size of the deficit is expected to be contained to about 1.5 per cent of GDP this year.
2. Inflation higher than the April projection to about 6 per cent by January 2016
3. The year 2015-16 has begun with net portfolio outflows
