RBI: To Closely Monitor Twin Deficits

The Reserve Bank of India (RBI) has sought the close monitoring of the twin deficits, the fiscal deficit and the current account deficits as there are chances of these widening, following the slide of the global economy and its spillover to the domestic economy. In the baseline scenario, the CAD would remain at sustainable levels in 2011-12, the central bank said. Estimates of sustainable CAD suggest a threshold of 2.7-3.0% of GDP. However, prospects for external sector for 2011-12 remain somewhat uncertain as global uncertainties could impinge on commodity prices and exchange rate movements.  India's balance of payments improved to 2.6% of GDP during 2010-11 from 2.8% during the preceding year led by a pick-up in exports during the second half and a higher invisibles surplus. Thus, India's CAD is within level of sustainable CAD, the central bank pointed out.. Capital flows to India improved during 2010-11, reflecting the positive perception of India's growth prospects, RBI said. The composition and volatility of capital flows posed some concern. Meanwhile, as regards capital flows, the impact is more difficult to gauge, the central bank added. Capital flows could surge or diminish, depending upon the degree of risk aversion. If global crisis turns deep, capital flows are more likely to moderate. On the other hand, capital flows to India could increase in spells on relative returns basis and due to large interest differentials, RBI stated. Financing of CAD for 2011-12 may not pose a problem unless the public debt fragilities in the Euro Zone and the growth slowdown in the US significantly impact capital flows. On the whole, the BoP situation remains manageable, though it necessitates continuous monitoring due to the global uncertainties, RBI added. Meanwhile, the fiscal deficit in 2011-12 is likely to overshoot the budgeted projections, stated the RBI in its annual report in the context of weakening global economy and the likelihood of some spillovers to the domestic economy. The central bank said that if the economy slows down beyond what is currently anticipated, the resultant revenue erosion could magnify the fiscal slippage. At the same time, the fiscal space to support any counter-cyclical policies is more limited than what existed at the time of the global crisis of 2008, RBI added.

IIFL