India’s current account deficit — the gap between the inflow and outflow of foreign currencies — soared to a record 6.7% of gross domestic product during October-December from 5.4% in the previous quarter.
The rise in the deficit, revealed in the latest data released by the Reserve Bank of India on Thursday, was caused by high oil and gold imports and subdued exports.
The deficit, which effectively means that India is spending more on imports than earning from exports, can force the country to dip into its $300-billion foreign exchange reserves to meet dollar payment obligations.
In 1991, India’s current account deficit stood at 4.2% of GDP — the market value of all final goods and services produced in a country during a particular period — forcing the government to mortgage gold as the forex reserves could meet barely three weeks’ import payments.
On Thursday, the finance ministry said in a statement: "Both the RBI and the government will continue to monitor the CAD and will take additional steps whenever warranted."
It hoped that deficit would come down in a few months as exports show signs of picking up.
Higher dollar outflows can weaken the rupee, making imported goods - such as crude oil and gadgets -- costlier. The rupee is currently hovering around 55 to dollar -- down by more than 15% since the beginning of 2012.
Economists, however, said India was far away from a 1991-like situation. "Our current reserves can take care of imports of up to seven months," said Samiran Chakraborty, Regional Head of Research, South Asia Global Research at Standard Chartered.