Containing inflation is not just crucial to manage domestic economy, it is also important to protect the edge of Indian exports. Also, ensuring sustainable current account deficit is must to support robust economic growth, according to Reserve Bank of India.
Although financing of the current account deficit may not be a problem, possible increase in the magnitude of the deficit could pose sustainability risks. Sustainable current account deficit is important for stable growth.
Persisting high positive inflation differential will be a source of pressure on the external competitiveness of Indian exports. Containing inflation, thus, is important even for improving the external balance position, RBI said in its review of macroeconomic and monetary development (MMD).
Overall, India’s balance of payments situation reflected the impact of robust domestic growth, which was visible in the wider current account deficit. The upbeat growth outlook of India and rising interest rate differentials have contributed to attract larger net capital inflows, which financed the current account deficit.
Going forward, the magnitude of the current account deficit may exceed the previous year levels, as asymmetry between the growth outlook of India and the developed countries is likely to persist, which will be reflected in export growth lagging behind import growth during the year.
India’s CAD at end of June 2010 was 3.67 per cent of gross domestic product. Recent outlook for capital flows to EMEs suggests that after the temporary uncertainty created by the sovereign risk concerns in the euro area, capital flows to EMEs will be stronger.
