Painting an optimistic picture on the external front, the Reserve Bank has said the country is ready for the US Federal Reserve's tapering, and has pegged the current account deficit at below 3 per cent for this fiscal in its eighth Financial Stability Report.
"External sector risks have been considerably reduced and the effect of the tapering on the economy is expected to be limited and short-lived," the report released today said.
Delay in the tapering of the USD 85 billion-a-month bond buyback programme by the US Fed (tapering will start from January 1) gave the country time to replenish the forex reserves and rein in the high current account gap.
In the third week of December, the US Fed announced that it would cut back bond buying by USD 10 billion a month to USD 75 billion from January on the back of improvement in the world's biggest economy.
"The CAD is expected to be less than 3 per cent of the GDP during the current financial year," the RBI said in the half-yearly report. "On balance, the country's external position appears to be manageable and reserves seem adequate."
CAD shot up to an all-time high of 4.8 per cent last year on account of a heavy trade deficit and higher gold imports.
The high CAD, along with fears of tapering, was one of the reasons for the rupee touching a lifetime low of 68.85 against the dollar on August 28 this year. The rupee improved since then, but is still 14 per cent lower year-to-date.
The authorities acted on multiple fronts, curbing gold imports, opening currency swap windows to get fresh dollar flows, and increasing money market rates to reduce speculation.
All of these resulted in the CAD coming down to 1.2 per cent of GDP in Q2 and the exchange reserves rallying for six weeks till mid December at over USD 295 billion as of last week.
