The Reserve Bank of India on Thursday cautioned that certain upside risks to current account deficit (CAD), that had fallen significantly in 2013-14, cannot be ruled out. In this regard, potential risks could emanate from both domestic and global factors, the RBI said in its annual report.

CAD arises when a country’s total imports (of goods and services) and transfers are greater than exports,

First, as economic slack diminishes with recovery in the domestic economy, the upturn in the investment cycle will require higher non-oil, non-gold imports, which already seem to be under way since May 2014.

Gold imports

Second, speedy easing of norms for gold imports could lead to a widening of CAD in 2014-15. In fact, growth in gold imports turned positive in June 2014 after a span of 11 months.

Third, even though international crude oil prices were earlier projected to stay low with gradual easing of the supply side, the re-emergence of geopolitical risks, particularly in Iraq and Russia’s on-going tensions with Ukraine, may keep oil prices relatively firm and thus have implications on India’s oil import bill.

This may pose upward risks to India’s CAD. Fourth, notwithstanding a modest recovery in exports on the back of rising global demand and adjustment of the rupee exchange rate in 2013-14, downside risks continue due to uncertainty on the global growth outlook.

Lastly, some sector-specific issues, particularly relating to drugs and pharmaceuticals, iron ore and coal need to be addressed to ensure a better trade balance.

After widening to a historical annual high of 4.7 per cent of GDP during 2012-13, the CAD narrowed sharply in 2013-14 to 1.7 per cent aided by a lower trade deficit. A modest recovery in exports and a sharp fall in imports, particularly of gold, helped in improving India’s trade balance.

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