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RBI again flags widening CAD as concern

RBI flagged the current account deficit (CAD) as a major concern, saying that it would have widened in the April-June quarter due to a steep fall in the rupee as well as spike in gold imports, and called for immediate structural reforms to stem the tide.

twitter-logoPTI | July 30, 2013 | Updated 08:28 IST

RBI on Monday flagged the current account deficit (CAD) as a major concern, saying that it would have widened in the April-June quarter due to a steep fall in the rupee as well as spike in gold imports, and called for immediate structural reforms to stem the tide.

The apex bank has expressed its concern over the expanding CAD, which is the difference between inflow and outflow of foreign currency, in the past two policy reviews .

The Reserve Bank said in its first quarter macroeconomic and monetary development report, released on the eve of Q1 monetary policy review: "Though CAD is is expected to moderate this fiscal, volatile markets and the potential tapering of quantitative easing in the US pose a risk to CAD financing.

"External sector policies need to be carefully calibrated over the short to medium-term with a view to containing CAD within manageable levels and financing it through more stable flows."

The CAD, after hitting a historic high of 6.7 per cent of GDP in Q3 of last fiscal, improved sharply to 3.8 per cent in Q4, closing the fiscal with a deficit of 4.8 per cent of GDP, which was a 60 bps higher than the previous fiscal.

The report said, however that "trends in initial trade data suggest that CAD may remain high in Q1 of the current fiscal. But in subsequent quarters, CAD is expected to improve, since the import demand for gold may moderate".

Noting that external sector imbalances have persisted and brought the rupee, which shed over 11 per cent in the first quarter, under pressure, it said despite the moderation in CAD in Q4, FY13, it remained above the sustainable level.

The apex bank's report warned that the rising trade gap in Q1 poses increased challenges to CAD.

Exports from emerging markets like Brazil, Russia, Malaysia and Indonesia have contracted in recent months and China also witnessed subdued trend in export in May and June.

All these pose challenges to our exports too, it said.

"Improving export growth this fiscal remains a challenge given the subdued prospects of global trade expansion. The IMF has lowered the growth projection of world trade volume for 2013 by 0.5 percentage points to 3.1 per cent," the report maintained.

Going the by initial trends in exports and imports in Q1, the report said it suggested a widening of the merchandise trade deficit.

Trade deficit widened from $42.2 billion in Q1 of FY13 to $50.2 billion in Q1 of FY14, mainly on account of a sharp increase in gold imports.

Besides, exports contracted in May and June after recording growth for five consecutive months since last December.

In contrast, imports grew 6 per cent in Q1 of FY14 as against a decline of 5.7 per cent in Q1 of FY13.

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