RBI says CAD to fall, raises hopes of gold import duty cut

Mumbai, January 28, 2014: The Reserve Bank of India (RBI) has said current account deficit (CAD) in this financial year is expected to decline to below 2.5 per cent of GDP from 4.8 per cent a year ago.

The statement raises hopes of a cut in import duty on gold.

"The full year CAD is likely to be below 2.5 per cent of GDP," the central bank said during its monetary policy review, adding that resumption in portfolio flows and pick up in FDI and External Commercial Borrowing (ECB) should help finance the CAD comfortably.

The deficit was at 4.9 per cent in Q1 and came down to 1.2 per cent in Q2. In the first half, CAD stood at 2.6 per cent.

CAD, which is the difference between inflow and outflow of foreign currency, was at a record high of 4.8 per cent or $88.2 billion in 2012-13.

The government had raised the customs duty on gold in phases from 4 per cent to 10 per cent in 2013 to check CAD. Besides, the RBI had enforced 80:20 rule to ensure that at least 20 per cent of the imports are exported before the exporters are allowed to import fresh quantities.

Now, there is pressure on the government to reduce import duty on gold and relax inward shipment of the metal. 

In the backdrop of improvement in the CAD situation, Finance Minister P Chidambaram had said the government would review gold import restrictions by March-end.

RBI, however, also cautioned that government would have to careful with regard to CAD as capital flows to Emerging Market and Developing Economy (EMDEs) in the next fiscal could moderate.

"As capital flows to EMDEs could moderate over 2014-15, there is no scope for complacency and the breather provided by a reduction in the immediate risks needs to be used to develop the resilience of the external sector over the medium-term," RBI said.

In its Macroeconomic and monetary developments review for the third quarter, the RBI said restrictions on gold import and improvement in global trade has brought down the trade deficit and CAD in the current fiscal.

"Despite a significantly more comfortable external position than in the summer of 2013, both fiscal and monetary authorities need to continue their efforts at macroeconomic stabilisation," the central bank said.

Courtesy: Business Today