High CAD to threaten macroeconomic stability, stunt growth: RBI

Expressing concern over the rising Current Account Deficit (CAD), the RBI today said it will threaten macroeconomic stability and impact growth.

"Large fiscal deficits will accentuate the CAD risk, further crowd out private investment and stunt growth impulses," RBI said in its third quarter policy review.

CAD, which is the difference between the inflow and outflow of foreign currency, touched a record high of 5.4 per cent in the July-September quarter. The CAD in 2011-12 fiscal was 4.2 per cent.

Besides, a high fiscal deficit is a cause of concern and the government hopes to restrict it at 5.3 per cent of GDP in the current fiscal.

"Domestically, the widening of the CAD to historically high levels in the context of a large fiscal deficit and slowing growth exposes the economy to the risks from twin deficits," RBI said.

It said that financing the CAD with increasingly risky and volatile flows raises the economy's vulnerability to sudden shift in risk appetite and liquidity preference, potentially threatening macroeconomic and exchange rate stability.

The RBI said that risks in global economy remain elevated with potential for spillovers on Indian economy through trade.

"These forces can potentially increase global risk aversion with implications for financing of the CAD," it said.

Stressing on the need for controlling the surging CAD, the RBI had yesterday said that CAD may deteriorate further in view of declining exports and may constrain monetary policy easing.

Battling a high CAD, the Centre is trying to attract more foreign funds into the country and has also hiked import duty on gold to check outflow of funds.

The RBI's professional forecasters survey projected CAD to be 4.2 per cent of GDP in the current fiscal as well.

... contd.

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