RBI Raises Red Flag on Surging Current A/c Deficit

Central bank Governor Duvvuri Subbarao pointed out dangers of a widening current account deficit on economic stability at a recent summit of the regulators, which may prompt some policy actions by the government. Subbarao flagged his concerns on the dangers of relying on volatile capital flows to finance the country’s rising current account deficit—the excess of imports over exports of goods and services—at a recent meeting of the Financial Stability and Development Council, or FSDC, ahead of the union budget, said people familiar with the discussions. The deficit, if unchecked, could lead to adverse investor perceptions about the economy. The council, which is headed by Finance Minister Pranab Mukherjee and has the chiefs of all financial sector regulators and senior finance ministry officials as its members, meets periodically to discuss issues relating to financial stability, macro prudential supervision and inter-regulatory co-ordination. Liberalisation of foreign direct investment, making bank deposits attractive for non-resident Indians, and freeing up of petroleum products prices could ease the deficit problem that is nearing levels seen during the 1991 currency crisis when the nation pledged its gold reserves to redeem itself. If the deficit situation deteriorates, the rupee could come under pressure, worrying overseas investors. “Though a weak currency typically boosts exports and trade balance, depreciating the currency may not necessarily address the problem in case of India as a sizeable portion of imports (e.g. oil) are price inelastic to a great extent,” said Siddhartha Sanyal, chief India economist at Barclays Capital.