Expressing concern over the rising Current Account Deficit (CAD), the Reserve Bank of India today said that it will threaten the macroeconomic stability and impact growth.
“Large fiscal deficits will accentuate the CAD risk, further crowd out private investment and stunt growth impulses,” RBI said in its third quarter policy review.
CAD, which is the difference between inflow and outflow of foreign currency, touched a record high of 5.4 per cent in the July-September quarter. In 2011-12 fiscal, it was 4.2 per cent.
Besides, a high fiscal deficit is a cause for concern and the Government hopes to restrict it to 5.3 per cent of GDP in the current fiscal.
“Domestically, widening of CAD to historically high levels in the context of a large fiscal deficit and slowing growth exposes the economy to the risks from twin deficits,” the central bank said.
It said that financing CAD with increasingly risky and volatile flows raises the economy’s vulnerability to sudden shift in risk appetite and liquidity preference, potentially threatening macroeconomic and exchange rate stability.
The RBI said that risks in global economy remain elevated with potential for spillovers on Indian economy through trade.
“These forces can potentially increase global risk aversion with implications for financing of the CAD,” it said.