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RBI economists optimistic on CAD

September 20, 2022

RBI economists optimistic on CAD
Economists at the Reserve Bank of India and bankers differ on the future state of India’s external account as the two sets see differing outcomes based on the fall in commodity prices and foreign portfolio flows. 

The softening of international crude and commodity prices has added confidence among RBI economists that besides reining in inflation, even the current account deficit could end up lower than what was feared by the market at 3% of GDP for this fiscal along with a comfortable balance of payments position. 

“Overall, the current account deficit (CAD) is expected to be within 3% of GDP,” according to a report by RBI economists in the latest monthly bulletin. “With portfolio flows returning and foreign direct investment remaining strong, this order of deficit is eminently financeable.” 

Several economists have pencilled in a CAD of over 3% for FY23 as the trade deficit touched a new high in August, besides projecting a substantial balance of payments deficit this fiscal on volatile portfolio flows. 

The less austere inflation outlook is also associated with an improvement in India’s net terms of trade, which should have favourable implications for the external current account balance, the RBI economists said. They expect inflationary pressures to ease from the third quarter of FY23. The headline CPI has remained above the 6% upper end of the target band for more than six months now. 

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