Pointing to tough times for the country’s external sector, the Reserve Bank of India (RBI) on Monday said risks to current account deficit (CAD) had risen further owing to the slowing global economy and debt-related stress in the euro area.
The external situation is expected to remain manageable. But overall, the balance of payments outlook for 2011-12, although stable, warranted close monitoring, RBI said in its macroeconomic and monetary development report.
Trends in capital inflows so far suggest the Indian economy has received sufficient flows to finance CAD during the first half of 2011-12. The wider CAD was financed comfortably, particularly on account of a marked increase in foreign direct investment (FDI) into the country.
India’s current account deficit hit 3.1 per cent of gross domestic product (GDP) at the end of the quarter ended June. The Prime Minister’s Economic Advisory Council has pegged the CAD at 2.7 per cent for this financial year. Last year, it was 2.6 per cent of GDP.
The CAD rose to $14.5 billion from $12 billion in the same quarter of 2010-11, due to an increase in trade deficit and continued net outflow on investment income.
RBI said there has been a marked decline in net inflows from foreign institutional investors. But a significant pick-up in FDI inflows augurs well from the sustainability point of view.
Going forward, capital flows into India would depend on how the economic and financial conditions evolve in advanced economies. It is important to encourage FDI inflows to impart stability to India’s capital account.
RBI said the buoyancy in FDI inflows may continue during the second half, as projects attracting significant FDI are already in the pipeline. Uncertainty remains, however, regarding portfolio flows, which are volatile by nature.
Debt-creating capital flows are also uncertain in spite of the widening interest rate differential. So far, external commercial borrowings by Indian companies have registered healthy growth. NRI deposits showed a marginal rise.
The increase in the annual limit for eligible borrowers under the automatic route may help in sustaining the uptrend in ECBs in the coming quarters of 2011-12. But, if euro imbroglio continues, it may affect the availability and cost of debt-creating flows.
Referring to the unfolding merchandise trade situation, RBI said there was progressive diversification in exports, in terms of commodities and destinations, up to September. They have grown faster than imports and net services also continue to grow, albeit at moderate pace.
However, due to the rising uncertainty in growth prospects of US and European economies, the growth momentum may not be sustained.
