India’s current account deficit (CAD) — the difference between dollar inflows and outflows — stood at a historic high of 4.8% of GDP in 2012-13, amid signs that the gap could remain at worrisome levels, despite having halved to 3.6% of GDP during January to March, from the previous quarter’s 6.7%, latest Reserve Bank of India (RBI) data showed.
RBI, which also released the Financial Stability Report (FSR) on Thursday, warned that macro-economic risks facing the Indian economy have increased during the last six months, hit by weak corporate performance, subdued domestic growth and wobbly world economy.
India's economic growth has slumped to a decade-low of 5%, hit by a crippling industrial slowdown that has hurt income growth and job prospects.
“CAD and its non- disruptive financing have emerged as major challenges from the perspective of macroeconomic stability,” the FSR said.
‘Non-disruptive’ financing broadly implies the extent to which the RBI can help finance the CAD without dipping into the pool of foreign exchange reserves that currently stand at $290 billion.
RBI cautioned that currency and equity markets, which had been riding high on cheap money pumped in by the US Federal Reserve over the last few years, will remain volatile.
“Cross-border volatile capital flows have made India vulnerable to sudden stops and reversals (as evidenced recently) following the slightest hint of exit from quantitative easing (QE) by the Federal Reserve,” D Subbarao, RBI governor said in the foreword of the FSR.
The finance ministry said Indian markets are being too pessimistic about the CAD.
“We do certainly believe that (the) market is over reacting. And this is evident from the fact (that) it over reacted by anticipating a much higher CAD for the entire last year,” the finance ministry said in a statement.
Earlier, finance minister P Chidambaram had said capital outflows could widen the CAD.
Economic affairs secretary Arvind Mayaram indicated more measures could be coming to prop up the rupee. “Let us hope so,” he told reporters.
The central bank said India faces challenges to finance its record high current account deficit given the risks of large-scale capital outflows.
“In addition to the magnitude of flows needed to finance the CAD, the composition of flows, particularly dependence on portfolio and short-term debt flows represent an added source of concern,” it said.