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Describing the external sector as the “biggest threat” to macroeconomic stability, the Reserve Bank of India has urged the Government to take immediate steps to narrow the current account deficit (CAD), which has hurt the rupee and overall growth.
“The biggest risk to the macroeconomic outlook stems from the external sector,” RBI Governor D. Subbarao said today, while unveiling the first quarter review of the monetary policy.
The central bank has left the key policy rates unchanged and cut the GDP growth estimate for this fiscal to 5.5 per cent from 5.7 per cent.
The large CAD, well above the sustainable level of 2.5 per cent of GDP for three years in a row, is a formidable structural risk factor, RBI said.
The Governor urged the Government to act swiftly to tackle the problems posed by high CAD, cited as a major reason for the rupee’s over 10 per cent decline this fiscal.
The recent measures by RBI to restore stability to the foreign exchange market should be used as a window of opportunity to put in place policies to bring the CAD down, the central bank said.
“It should be emphasised that the time available now should be used with alacrity to institute structural measures to bring the CAD down to sustainable levels,” Subbarao said, adding that the central bank is ready to do its bit.
CAD, which widened to an all-time high of 4.8 per cent of GDP in FY’13, has brought the external payments situation under increased stress, reflecting rising external indebtedness and the attendant burden of servicing of external liabilities, it said.
In its macroeconomic report yesterday, RBI said ebbing of the CAD in Q4 of last fiscal will not be sustained in Q1 of this fiscal due to increasing imports of gold and coal, apart from rising crude prices.
Given the wide CAD, RBI urged the Government to adjust the administered prices in the energy sector and pass on the increases to consumers to help keep the fiscal deficits under check.
RBI has tightened liquidity to curb the forex speculation. It also introduced steps to restrict gold imports, which have put pressure on the CAD.
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