RBI estimates current account deficit at 1.5 per cent in FY16

RBI estimates current account deficit at 1.5 per cent in FY16

Current account deficit is estimated to be around 1.5 per cent of the GDP in the current fiscal, helped by sharp fall in oil prices even as gold imports rose in the past few months, the Reserve Bank said today. Gold imports spiked in the month of March and remained elevated in April owing to regulatory relaxations and festival demand, the central bank said.

“Given these developments, the reduction in the current account deficit resulting from the sharp decline in oil prices has begun to reverse, though the size of the deficit is expected to be contained to about 1.5 per cent of GDP this year,” RBI Governor Raghuram Rajan read in his second bi-monthly Monetary Policy Statement.

In the first half of the 2014-15 fiscal, CAD was at 1.9 per cent of the GDP (USD 18 billion). The CAD, which is the difference between the inflow and outflow of foreign exchange, was 1.7 per cent of GDP (USD 32.4 billion) in 2013-14.

India’s merchandise export growth weakened steadily since July 2014 and entered into contraction from January through April 2015. Therefore, RBI said that net exports are unlikely to contribute as much to growth going forward as they did in the past financial year.

Consequently growth will depend more on a strengthening of domestic final demand,” Rajan said.

While portfolio and direct foreign investment flows were buoyant during 2014-15, with net foreign direct investment into India at USD 36.6 billion and net portfolio inflows at USD 41 billion, the year 2015-16 has begun with net portfolio outflows in the wake of a reduction in global portfolio allocations to India, RBI said.

India’s foreign exchange reserves are around USD 350 billion, which provides for a strong second-line of defence to good macroeconomic policies if external markets turn significantly volatile, it added.

In April, India’s exports contracted by about 14 per cent to USD 22 billion due to a sharp dip in petroleum, gems and jewellery shipments, which was the fifth straight month of decline.

The slump in exports was mainly due to global slowdown and softening of crude, metal and commodity prices.

India missed the annual exports of target of USD 340 billion for 2014-15. Exports were at USD 310.5 billion in the previous fiscal.