RBI warns of record current account deficit

The Reserve Bank of India (RBI) has warned of India's current account deficit reaching a record high in the current financial year ending 31 March 2013.

RBI expects India's current account deficit (CAD) or trade deficit to exceed its comfort level for the second successive year in 2012-13, making it a major constraint in further easing monetary policy.

The CAD/GDP ratio reached its highest ever peak of 5.4 per cent of GDP in Q2 of 2012-13. Early indications are that it may increase further in Q3 of 2012-13 as trade deficit worsens, according to the central bank.

Weak external demand for India's exports and continuing large imports of oil and gold has resulted in deterioration in India's trade balance.

RBI governor D Subbarao said the country needed more foreign investment in assets such as plants and equipment rather than volatile flows into its equity and debt markets, he said.

While strong capital flows and increased FII debt investment limits may enhance inflows, they do not provide a solution to CAD financing on a sustainable basis, RBI said.