India's current account deficit, which represents net outflow of income from the country barring capital movement, surged to $13.7 billion in April-June this fiscal, but is manageable as the country is receiving huge capital inflows, say economists.
Current account deficit (CAD) trebled to $13.7 billion in April-June over the same period last year, due to larger imports after economic recovery and higher payments abroad for certain services.
"Although CAD is high, but we do not see any financing problem. Capital inflows will bridge the high CAD and throughout the year capital flows is expected to remain healthy," Yes Bank chief economist Shubhada Rao said.
Despite eurozone crisis, which moderated inflows by foreign institutional investors, capital inflows remained robust due to higher external commercial borrowings by India Inc and external assistance in the first quarter of 2010-11.
India received $17.5 billion of foreign capital on net basis in April-June against $4.6 billion in the year- ago period.
With the country receiving more capital inflows than its deficit on current account, there was net accretion of $3.7 billion to foreign exchange reserves of the country.
"If FII flow dampens suddenly, then financing the high CAD could be a concern. But I do not see such a situation arising in the context of likely further easing in the US and continued growth story in India," Rao said.
Prime Minister's Economic Advisory Council Chairman C Rangarajan discounted fears on the widening current account deficit saying it will not be a problem to finance the deficit this fiscal due to the high capital inflows.
Crisil chief economist D K Joshi said, "Right now we have good capital inflows. Although a high CAD makes an economy vulnerable, but right now there is no peroblem."
Though first quarter CAD constituted 3.7 per cent of GDP, Joshi pegged it at 3 per cent for the entire 2010-11.
However, financial services firm Nomura India projected CAD to increase to 3.7 per cent of GDP this fiscal against 2.9 per cent last fiscal.
"We expect the CAD to worsen in the third quarter, but high net capital inflows should boost the Balance of Payments surplus. Overall, we expect a CAD of 3.7 per cent of GDP in FY11," Sonal Varma, economist with Nomura, said.
Barclays Capital Research also expected CAD to increase to 3.6 per cent of GDP this fiscal on strong domestic demand and rising commodity prices.
"Given the strong growth momentum in India and the weaker export prints in recent months, the current account deficit is likely to widen further in the coming quarters."
