Investment research firm Goldman Sachs has released a report on the rising current account deficit in India. The key highlights and outlook for the same are as follows:
Key Highlights:
> India`s current account deficit is being increasingly financed by short-term capital, rather than FDI, which is enlarging short-term debt and raising external vulnerability.
> We flag the deterioration in external balances as the biggest risk to India`s growth story, and one that investors should follow closely.
> That said, gross international reserves currently remain sufficient to cover temporary reversals of capital.
> We think the likely policy response will be to continue to tighten fiscal and monetary policies, and prevent any temporary sharp appreciation of the INR.
> We believe current account deficit could widen to 4% of GDP in FY11 and further to 4.3% in FY12, its highest ever level. ``We believe the optimal policy response should be to tighten fiscal first and also monetary policy, and keep the nominal exchange rate from appreciating. However, given spending pressures on NREGA, food subsidies, and infrastructure investment, we do not think that fiscal policy will be sufficiently tight going forward in FY12, `` it said.
``We continue to hold the view that the Reserve Bank of India (RBI) will need to tighten policy rates by 50-75 bp by June 2011. We think that the burden in attempting to moderate demand will fall on monetary policy. The risk-reward for the RBI is skewed towards a tighter policy. Raising interest rates would help moderate demand which can then limit inflationary and current account deficit pressures.``
Dion Global Solutions Ltd
Key Highlights:
> India`s current account deficit is being increasingly financed by short-term capital, rather than FDI, which is enlarging short-term debt and raising external vulnerability.
> We flag the deterioration in external balances as the biggest risk to India`s growth story, and one that investors should follow closely.
> That said, gross international reserves currently remain sufficient to cover temporary reversals of capital.
> We think the likely policy response will be to continue to tighten fiscal and monetary policies, and prevent any temporary sharp appreciation of the INR.
> We believe current account deficit could widen to 4% of GDP in FY11 and further to 4.3% in FY12, its highest ever level. ``We believe the optimal policy response should be to tighten fiscal first and also monetary policy, and keep the nominal exchange rate from appreciating. However, given spending pressures on NREGA, food subsidies, and infrastructure investment, we do not think that fiscal policy will be sufficiently tight going forward in FY12, `` it said.
``We continue to hold the view that the Reserve Bank of India (RBI) will need to tighten policy rates by 50-75 bp by June 2011. We think that the burden in attempting to moderate demand will fall on monetary policy. The risk-reward for the RBI is skewed towards a tighter policy. Raising interest rates would help moderate demand which can then limit inflationary and current account deficit pressures.``
Dion Global Solutions Ltd
