RBI warns on widening current account deficit

The Reserve Bank has said the widening current account deficit (CAD) could pose a risk to the economy if the global trade and capital flows to the country shrink further.

"If global financial market stress increases further and affects capital flows to the emerging markets, financing of CAD could pose a challenge," the RBI said in its report on the macroeconomic and monetary developments, released on the eve of the second quarter monetary policy.

It further warned that exports are also expected to decelerate in the second quarter of the fiscal after the CAD widened in the first quarter.

The CAD, represents the difference in inflows and outflows of foreign exchange of a country, rose to $14.5 billion during the first quarter from $12 billion reported in the same period last fiscal due to rise in trade deficit, outflow of investment income among others. It touched 3.1 per cent of the GDP during this period.

The central bank also said the rupee had seen significant depreciation in the second quarter, which is in line with that of other emerging market currencies due to rising risk aversion.

Referring to liquidity situation, it said though liquid conditions remained in deficit mode as per the policy objective, it is comfortable.

The report also forecasts moderation in credit growth going ahead but noted that real interest rates are still supportive of growth.

"Going forward, credit growth is expected to moderate as growth slows down. Monetary transmission is still unfolding in response to significant monetary tightening since February 2010. However, real interest rates are still low and supportive of growth," it said.