Reserve Bank of India (RBI) Executive Director D K Mohanty on Tuesday said the country’s import cover reserves might fall further this financial year in the absence of capital inflows. At the end of March, India’s foreign currency reserves were at about seven months of import cover according to data from the central bank.
The senior central bank official said financing current account deficit was becoming a problem since capital was not flowing in for a number of reasons. “But we want to maintain our lifestyle and consumption... So, we have to dip into the reserves. We are drawing from the reserves, we built in the pre-crisis period and since then we are not adding anything, it is coming down,” said Mohanty.
He pointed out the import cover had shrunk sharply from 14 months in the pre-crisis high growth phase to nine months in the post-crisis period and to seven months in 2011-12.
“In 2012-13, it could be even less...at six plus something,” said Mohanty, while addressing a national seminar on emerging market economies, organised by Ramnarain Ruia College here. He added the country’s external vulnerability had increased in the post-crisis years.
He said apart from monetary factors, issues like infrastructural bottlenecks and policy uncertainties were also contributing to the current domestic growth slowdown.
“You have created huge capacity for power production, but there is no electricity because coal linkage is not there. You are building roads but these are roads to nowhere because land acquisition is not happening,” said Mohanty.
Speaking on how interest rates could be brought down, Mohanty said inflation needed to be controlled. He said it was important to go back to the fiscal consolidation path “to enable monetary policy to do what it is supposed to be doing”.
In July, the wholesale price index inflation rose 6.8 per cent, compared to last year while retail inflation continued to be sticky at around 10 per cent in the same period. He said agricultural production and productivity had to be increased in order to improve supply side response.
He said India might become an upper-middle-income country by 2025, assuming that the high growth momentum was regained and the exchange rate behaves with the inflation differential.
Citing inflationary risks and government inaction, the central bank had kept policy rates unchanged for two consecutive policy reviews after cutting them by 50 basis points in the annual monetary and credit policy in April. RBI is scheduled to announce mid-quarter policy review on September 17.
