Mumbai: The Reserve Bank today warned that a high current account deficit of 3.5 per cent of the GDP in the 2010-11 fiscal is not sustainable and may widen further with the recovery of the global economy.
The country's CAD, representing the difference in inflows and outflows of foreign exchange, barring capital movements, stood at 2.9 per cent of the GDP last fiscal.
However, in the July-September quarter this fiscal, the CAD surged by 72 per cent to USD 15.8 billion, compared to USD 9.2 billion in the same period last year due to higher imports.
"Although recent trade data suggests moderation of the trade deficit in the latter part of the year, overall CAD for 2010-11 is expected to be about 3.5 per cent of GDP. A CAD of this magnitude is not sustainable," the RBI said in its third quarterly monetary policy review for 2010-11.
India's exports witnessed 36.4 per cent annual growth in December to USD 22.5 billion, the highest in 33 months, while imports contracted by 11.1 per cent to USD 25.1 billion, resulting in narrowing of the trade deficit to USD 2.6 billion, the lowest in three years.
However, the central bank pointed out that although recent trade data shows an improvement in exports vis-a-vis imports, the sharp increase in global commodity prices, particularly oil, could have an adverse impact on the trade balance going forward.
"This has implications for both the CAD and inflation. There is, therefore, a need for concerted policy efforts to diversify exports and contain the CAD within prudent limits," it said.
It added that although larger net capital inflows were absorbed in financing the higher current account deficit, the composition of capital flows poses sustainability risks.
"Faster-than-expected global recovery may enhance the attractiveness of investment opportunities in advanced economies, which may impact capital flows to India. This may increase the vulnerability of our external sector.
Hence, the composition of capital inflows needs to shift toward longer-term commitments, such as FDI," the apex bank said.
While buoyancy in capital inflows continued during Q2 of 2010-11, driven by large FII inflows, FDI moderated mainly on account of lower inflows into the real estate, construction, and financial services sectors, it said.
During the July-September quarter, FIIs pumped USD 18.8 billion into the Indian economy, but FDI fell to USD 2.5 billion year-on-year.