Subbarao warns of record current account deficit

Reserve Bank Governor Duvvuri Subbarao on Monday cautioned the country was headed for the highest ever current account deficit this fiscal, after it rose to 5.3 per cent of GDP in the second quarter.

"Last year, CAD was 4.2 per cent of GDP, but this year we expect it would be significantly higher than that. It's going to be historically the highest CAD measured as a proportion of GDP," the Governor said, though he refrained from giving any figure.

He also expressed concern over the way the CAD, which is the gap between forex gained and forex spent, is being financed by volatile inflows instead of more foreign direct investments.

Subbarao was addressing the convocation ceremony of the RBI-set up Indira Gandhi Institute of Development Research (IGIDR) in Mumbai.

The trade gap

is widening mainly because of higher import of oil and gold. The third quarter numbers are expected later this week.

Flagging his concerns over CAD, which was the overriding theme of the third quarter monetary policy announced on January 29, Subbarao said these were regarding its level, quality and the way it is being financed.

"We would not worry if the widening CAS is on account of import of capital goods, but here it is high on account of import of oil and gold.

"The other concern is the way we are financing it. We are financing our CAD through increasingly volatile flows. Instead, we should ideally be getting as much of FDI as possible to finance the CAD. On the other hand, what we are getting is a lot of volatile flows to finance it," Subbarao said.

In FY12, after hitting a high CAD of 4.3 per cent, which was then a record, CAD had declined to 3.9 per cent of GDP, though it was 10 bps above the year ago period.