 "Financing CAD a key challenge: RBI")
“Non-disruptive financing of the high CAD and containing its size within sustainable levels has become the key challenge in managing the external sector, especially mitigating its vulnerability to global shocks,” the central bank said.
For the quarter ended March, the CAD stood at $18.1 billion, or 3.6 per cent of gross domestic product (GDP), lower than estimates and the year-ago period’s CAD of $21.7 billion.
More From This Section
The high CAD is exerting pressure on the rupee, which has weakened 12 per cent against the dollar since the beginning of May.
The central bank also voiced concern on the rise in the country’s external debt. As of March-end, external debt stood at $390 billion, 12.9 per cent, or $44.6 billion, more than in the corresponding period last year. RBI said the increase in total external debt was primarily on account of a rise in short-term trade credit. It added external commercial borrowing and rupee denominated non-resident Indian deposits had risen considerably in 2012-13.
A factor that contributed to the widening CAD (in the first nine months of 2012-13) was the rising share of gold imports. According to RBI data, the share of gold imports to total imports has been steadily rising since 2007-08; in 2012-13, it stood at about three per cent of GDP. To curb gold imports, the government and the central bank have taken several steps such as raising import duty and advising lenders not to lend for gold purchases.
RBI said in a sluggish economy, a high CAD posed difficult macroeconomic policy challenges. However, it pointed to a silver lining — the recent sovereign outlook revision by rating agencies. “It is reassuring that some rating agencies have recently revised India’s rating outlook to stable, given the recent policy initiatives aimed at improving investment sentiment and growth,” RBI said.