RBI Sees India’s Current-Account Deficit Staying Within 3% of GDP

(Bloomberg) -- India’s central bank expects the country’s current account deficit to stay within a limit it considers sustainable amid softening global fuel, food and fertilizer prices while portfolio flows and exports pick up.

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“Overall, the current account deficit is expected to be within 3% of gross domestic product,” the Reserve Bank of India said in its September Bulletin released Friday. “With portfolio flows returning and foreign direct investment remaining strong, this order of deficit is eminently financeable.”

RBI Governor Shaktikanta Das has assured the markets several times that the current account gap will be sustainable and the central bank can finance it comfortably. Deputy Governor Michael Patra in an August speech pegged a range of 2.5%-3% of CAD as sustainable.

RBI’s take on the CAD -- the widest measure of external finances -- assumes importance as economists from Citigroup Inc. and Standard Chartered Plc. peg the deficit at near 4%, terming the record trade deficit in the last two months as ‘unsustainable’.

READ: India’s Current Account Gap Becoming Uncomfortable, ICRA Says

Inflation remains “elevated” and above RBI’s tolerance level, underscoring the need for monetary policy “to keep second order effects contained and inflation expectations firmly anchored,” while keeping growth in mind, the State of the Economy report in the bulletin said.

The central bank expects the near-term inflation prints to be “bumpy.” But it should moderate from next month and then move within the RBI’s 2%-6% tolerance band in the January-March quarter, trending “even lower” in April-June period.

READ: India August Inflation Accelerates to 7% on High Food Prices

Monetary policy focus should be on being “consistent in aligning inflation with the target.” Therefore, “front-loading of monetary policy actions can keep inflation expectations firmly anchored and reduce the medium-term growth sacrifice,” the report said.

The central bank has raised the benchmark policy rate by 140 basis points so far and is scheduled to hold its next rate review on Sept. 30.

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