30.10.12

Current Account Deficit snippets



Falling revenues from the services sector and a dip in exports due to global slowdown may result in higher current account deficit in the second quarter of the current fiscal, the Reserve Bank of India has said in its quarterly review of the economy.
The merchandise trade deficit has remained at the same level as in the first half of 2011-12, as slowdown in exports was matched by import contraction. This, coupled with the falling surplus in services trade over the medium term, is likely to leave the current account deficit — the net of imports and exports of goods and services — too wide for comfort, the RBI report says.
Current account deficit financing pressures can reemerge in the face of event risks, although the recent policy measures announced by the government have helped boost portfolio inflows for now. The rupee gained in strength against the dollar from early September on the back of bond-buying programmes announced by the central banks of Europe and the United States. This resulted in a surge in portfolio flows, easing the pressure on the rupee and, consequently, on importers to an extent.
Going forward, the trend in various components of services exports, which has been a crucial cushion for financing current account deficit, particularly business services and private transfers, would largely depend on economic activities in trading partner countries and movement in the rupee exchange rate.
It said India’s external sector faces some sustainability issues that emanate from large current account imbalances. Although reserves coverage and manageable external debt provide some comfort, macro-financial policies aimed at lowering inflation, containing demand by more restrained fiscal spending, improving trade competitiveness through structural and other policies and the direct use of trade policy measures would be needed for medium-term sustainability.

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