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CAD headed towards record high: Subbarao

Source : BUSINESS_STANDARD
Last Updated: Mon, Feb 11, 2013 21:25 hrs
Duvvuri Subbarao, governor of the Reserve Bank of India speaks during an interview with Reuters at a hotel in Mexico Cityb

This financial year, India's current account deficit (CAD), as a percentage of gross domestic product (GDP), is likely to rise to a record high. The country continued to depend heavily on oil and gold imports, while foreign direct investment was still below desired levels, Reserve Bank of India (RBI) Governor D Subbarao said on Monday.

Speaking at the 10th annual convocation of the Indira Gandhi Institute of Development Research, he said the high CAD wasn't the central bank's only concern; the way in which the deficit was financed was also a worry.

He said, "Last year, CAD was 4.2 per cent of GDP. This year, we expect it would be significantly higher. Historically, it's going to be the highest CAD, measured as a proportion of GDP."

Subbarao said there were three concerns about CAD. "The first is the level of CAD; the second is its quality. Here, we have CAD because of import of oil and gold. The third concern is the way we are financing it. We are financing our CAD through increasingly volatile flows. Instead, to finance CAD, we should get as much foreign direct investment as possible," he said.

In the last two years, the rupee had depreciated about 20 per cent; one would expect the depreciation to be a natural counterforce to an increase in the current account, he said, adding, "But we have the rupee depreciating about 20 per cent, as well as high CAD. That is because in the short term, our exporters are not able to take advantage of the depreciating rupee. On the other hand, our imports are inelastic. Exports are coming down. As a result, CAD is increasing."

In the fourth quarter of the last financial year, CAD was 4.5 per cent. For the first quarter of this financial year, it stood at 3.9 per cent; for the second quarter, it was 5.4 per cent.

In the third quarter review of monetary policy 2012-13 on January 29, the central bank had pointed to the high CAD and said this might prevent further cuts in interest rates.

RBI had reduced the repo rate and the cash reserve ratio by 25 basis points each. However, it didn't indicate the timing of further rate cuts, as inflation was still above the central bank's comfort zone.

Subbarao said though inflation had peaked, it was still high. He added growth, however, was low, even compared to the period after the financial crisis of 2008. Yields on the benchmark 10-year government bond inched up by two basis points following the government's comment on inflation.

"The first dilemma is balancing growth and inflation. Last year, growth was 6.2 per cent. It was not only low compared with pre-crisis years alone; it was also low compared with the immediate period after the crisis. We are all dismayed by the estimate that growth would stand at about five per cent. It will be the lowest in the last decade," he said.

According to advance estimates by the Central Statistics Office, GDP growth could drop to a decade-low of five per cent in FY13.

The RBI governor said, "Consumption has fallen, net exports have fallen and most importantly, investments have declined. That is a great concern because today's investment is tomorrow's production capacity. If investments are not taking place today, our growth potential for the road ahead would be hurt."

"If you look at other emerging economies, their growth rates fell. But inflation, too, declined. We have decelerating growth, but persistent inflation. We need to investigate why India is unique among countries of its size and peer group, in terms of the growth-inflation balance," Subbarao said.

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