Millennium Post

‘CAD biggest risk to Indian economy’

Describing the high current account deficit (CAD) as the biggest risk to the Indian economy, the RBI on Friday said that any further deterioration of CAD might result in its policy reversal stance. 'The biggest risk to the economy stems from the CAD which, last year, was historically the highest.... Monetary policy will also have to remain alert to the risks on the account of the CAD and its financing, which could warrant a swift reversal of the policy stance,' the RBI said in its monetary policy review.

CAD, which is the difference between the inflow and outflow of foreign currency, had touched a record high of 6.7 per cent in the December quarter of last fiscal year. The CAD in 2012-13 fiscal is likely to be around 5 per cent of the GDP. Elaborating further, the RBI said, 'The outlook for advanced economies (AEs) remains uncertain and even if there may be no event shocks, there could well be process shocks which could result in capital outflows from emerging developing economies (EDEs)".

It said that even as the large CAD is a risk by itself, its financing exposes the economy to the risk of sudden stop and reversal of capital flows, should global liquidity rapidly tighten.

'Further, with quantitative easing (QE), AE central banks are in uncharted territory with considerable uncertainty about the trajectory of recovery and the calibration of QE. Should global liquidity conditions rapidly tighten, India could potentially face a problem of sudden stop and reversal of capital flows, jeopardising our macro-financial stability,' warned the RBI
The country's central bank also noted that a large CAD, appreciably above the sustainable level, year after year, would put pressure on servicing of external liabilities. It said that a sustained revival of growth is not possible without a revival of investment.

On Thursday the apex bank, in its Macroconomic and Monetary Developments Report 2012-13, had said that the CAD in FY14 was likely to benefit from the moderation in global commodity prices. Gold prices had fallen to a 21-month low of Rs 26,440 per 10 gm in the domestic markets on April 16 due to continued sell-off in the global markets.

Although there has been some recovery in gold prices in the spot as well as futures market, uncertainty looms large over the way prices would move, going forward. Gold prices had touched an all-time high of Rs 32,975 per 10 gm on November 27, 2012.

The Reserve Bank of India has also expressed concern over the rising external debt and short-term borrowings to meet the widening CAD. 'Short-term debt on a residual maturity basis increased to 44 per cent of total debt and 56 per cent of the foreign exchange reserves by end-December 2012,' it had said.
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