The central bank is of the view that rise in external debt a concern but rating outlook revision reassuring.
Even if the country’s current account deficit (CAD) registering a sharp fall in the fourth quarter, financing it through stable flows remains the main concern for the central bank.
In its Financial Stability Report, issued on Thursday, the Reserve Bank of India (RBI) said high dependence on portfolio and short terms flows is an added concern.
“Non-disruptive financing of the high CAD and containing its size within sustainable levels has become the key challenge ion managing the external sector and especially mitigating its vulnerability to global shocks,” RBI said today.
Current account deficit for the January-March quarter was $18.1 billion, or 3.6% of GDP – which is lower than market estimate, and fell below the $21.7 billion deficit a year earlier. The high current account deficit is also exerting pressure on rupee which has weakened over 12% against the dollar since the start of May.
The central bank has also voiced concern on the rise in the country’s external debt.
The country’s external debt was at $ 390.0 billion, as at end-March 2013, which is an increase of $ 44.6 billion or 12.9% over the level at end-March 2012.
According to RBI, the increase in total external debt during financial year 2012-13 was primarily on account of rise in short-term trade credit. RBI has observed that there has been sizeable rise in external commercial borrowings (ECBs) and rupee denominated Non-resident Indian deposits as well.
The other factor which is contributing to the widening of CAD was rising share of gold imports. According to RBI data, the share of gold import to total import has been rising steadily since 2007-08 and was close to 3% of GDP in 2012-13.
The government and the central bank has been taking several steps to curb gold imports like hiking import duty, advising lenders not to lend for the purchase of gold, among others. These steps are expected to reduce gold import in the country.
Though lower commodity prices and moderation in gold imports could help narrowing the deficit but high CAD in a sluggish economy poses difficult macroeconomic policy challenges, the central bank observed.
However, the silvering lining in this gloomy scenario is the recent sovereign outlook revision by rating agencies.
“It is reassuring that some rating agencies have recently revised India’s rating outlook to stable given the recent policy initiatives aimed at improving investment sentiment and growth,” RBI said.
Earlier this month, Fitch had revised the country’s rating outlook to stable from negative and affirmed the ‘BBB-’ rating assigned earlier, on account of various steps taken by the government to address fiscal deficit and efforts to revive growth by removing structural bottlenecks.
Another rating major, Standard & Poor’s, in May, reaffirmed its 'negative' outlook on India's BBB- sovereign rating with a one-in-three chance of a downgrade over the next 12 months.
