Concerns on CAD recede but not dissipated,says RBI

The RBI today said that concerns on current account deficit have receded but not dissipated.

The Reserve Bank today said that concerns on current account deficit (CAD) have receded but not dissipated.

CAD,which amounted to 3.7 per cent of GDP in the first half of 2010-11,moderated to 2.1 per cent of GDP in Q3 FY 11,primarily reflecting pick-up in exports,the apex bank said in its Macroeconomic and Monetary Developments in 2010-11 released here.

“With this trend gaining further pace in Q4,the CAD for the full year may settle at around 2.5 per cent of GDP.

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However,the downward drift could reverse if the current spurt in global crude oil prices persists,” the RBI warned.

With a larger CAD,any abrupt tightening of external financing could put pressure on the exchange rate,raise cost of capital and feed through into inflation,it said.

Developments in global economic and financial market conditions could impact the capital account,especially if the central banks in advanced economies (AEs) start withdrawing monetary accommodation,the apex bank said.

“Such a withdrawal,however,is likely to raise global interest rates,reduce leveraged positions in global commodity markets and so help deflate global commodity prices,” the RBI said.