 "Risks to current account stay high")
A day before of its annual policy for 2013-14, the Central bank said the CAD in FY 14 is likely to benefit from moderation in global commodity prices. Yet, its sustainability continues to face risk from event shocks that may cause a sudden stop or reversal of capital inflows.
There is hardly any space for complacency, RBI it said in Macro economic and monetary developments report 2012-13.
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The modest pick-up in exports in Q4 of 2012-13 and some deceleration in imports may help to CAD in Q4 of 2012-13 after a record high of 6.7% of Gross Domestic Product (GDP) in Q3. Despite relief, the CAD as a per cent of GDP for FY13 is expected to be around 5%, twice the sustainable level.
The high CAD in Q3 of 2012-13 was adequately financed by capital inflows, without any reserves depletion. The reduced pressures on the trade deficit coupled with higher capital flows are likely to facilitate smooth financing of the CAD.
Yet, several risks remain, which require policy attention.
First, the moderation in CAD may still not be sufficient to bring it down to the sustainable level. Second there are also some other impediments to CAD reduction. Indian exports need to build productivity-based competitiveness and infrastructure bottlenecks should be dealt with.
It would be erroneous to take comfort from factors that are exogenous in nature, such as the fall in oil and gold prices, without addressing domestic structural problems, RBI added.
Third, even though FII flows remain strong at the moment, they may become volatile if global financial conditions turn adverse.
Fourth, the global economic outlook is far from rosy and downside risks remain substantial. Thus, sustaining Indian export recovery in such an uncertain situation would be a challenge that needs domestic efforts to raise productivity-based competitiveness.