Mumbai, Aug. 22: The Reserve Bank of India today had some good news amid the carnage in the rupee.
The central bank said the current account deficit (CAD), blamed for the rupee’s slide, would be less than the historic high seen in 2012-13 because of policy measures such as the curbs on gold imports.
CAD, the difference between the inflow and outflow of foreign currency, stood at 4.8 per cent of the gross domestic product (GDP) in the previous fiscal because of high oil and gold imports and moderation in export growth. Experts have been blaming high CAD for the recent crash in the rupee.
In its annual report for 2012-13, the RBI said though CAD was expected to widen during the first quarter of this year because of a higher trade deficit, it was likely to moderate thereafter.
After the sharp increase in the first two months of 2013-14, trade deficit has narrowed considerably in June and July, the RBI said.
“Going forward, CAD is expected to see correction because of trade policy measures taken to curb gold imports and price adjustments effected to moderate consumption of fuel products. Besides, there may still be scope for curbing non-essential imports as well to improve the trade balance,” the regulator said.
However, it cautioned that CAD might continue to be much above the sustainable level of around 2.5 per cent of GDP, necessitating measures towards improving export competitiveness, discouraging avoidable imports and improving stable capital inflows.
The RBI, however, warned that the depreciation in the rupee of nearly 11 per cent in the first four months of this fiscal could lead to higher inflation, while the pass-through of its fall is incomplete.
While the RBI has projected WPI inflation at around 5 per cent by March 2014, the annual report indicated some relief on the price front.
According to the central bank, though the prospects of onshore prices going up on account of rupee depreciation and firming up of global crude oil prices have increased, a normal monsoon has taken a major risk “off the horizon”.
The RBI also sees the growth outlook for the current year to be better than last year despite high consumer price inflation and rupee depreciation. The RBI had recently cut its GDP growth forecast to 5.5 per cent from 5.7 per cent for the current year.
In the annual report, the RBI called for a reduction in the high consumer price inflation. This, it said, is necessary to arrest the flagging growth rate of private final consumption expenditure.
The RBI also asked the government to remove structural constraints so that production and investment could gather momentum.