Current account deficit threat to India's financial stability: RBI.

MUMBAI: The Reserve Bank of India has warned that India's financial stability could be impaired if the current account deficit widens to uncontrollable levels.

The overall balance of payments, which measures the net import of goods and services along with net foreign capital inflows, may continue to be under pressure even if capital flows trend higher in the near term.

"Going forward, the CAD (current account deficit) may still remain under pressure if import of oil and gold does not significantly moderate. Robust gold demand and continuing high crude oil prices, along with decelerating growth in emerging and developing economies, or EDEs, may adversely affect India's trade balance," the Reserve Bank's latest report quarterly report on the state of the economy said. "A cautious approach with regard to trade and capital accounts is, therefore, required."

The CAD is at 4.3% of GDP in Q3 of 2011-12, reckoned to be the highest since the balance of payments crisis of 1991. The RBI has said even though debt inflows provide a means for financing the CAD, they have implications for India's external debt position and, consequently, for financial stability.

Major external sector vulnerability indicators worsened in Q3 of 2011-12. The reserve cover of imports, the ratio of short-term debt to total external debt, the ratio of foreign exchange reserves to total debt, and the debt service ratio deteriorated during the quarter, the report said.

RBI governor D Subbarao, speaking at a panel discussion in Delhi recently, said the situation was not as alarming as in 1991. "That is quite disturbing picture. Nevertheless, I would still argue that in 1991, an implosion was imminent. In 2012, an implosion is not imminent," he said.

With significant risks ahead, the RBI has called for caution in external sector policies and aggregate demand management so that CAD does not widen further and the external account parameters remain at prudent levels.

Steps need to be taken to facilitate a complete passthrough of international commodity prices, especially by raising domestic prices of petroleum products, curb the demand for precious metals and accelerate reforms to attract FDI, the report has said.

Source : economictimes.indiatimes.com