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  3. Country must limit its reliance on foreign debt to finance CAD: Raghuram Rajan

Country must limit its reliance on foreign debt to finance CAD: Raghuram Rajan

17 Sep 2014 Evaluate

Cautioning against growing dependence on foreign capital flows, Governor Raghuram Rajan underscored that Reserve Bank of India (RBI) would continue to limit its reliance on foreign debt to finance the country’s current account deficit (CAD). He further added that it was essential that the economy in a way was careful and circumspect about this since financial conditions could change anytime and that the money the economy had gained was largely out of the stimulus offered by some developed countries like United States (US).

Further, he emphasized that financial conditions could change since at some point of time the investors would find greater usage of their money back home and they may want to exit once again, thus funding the Current Account Deficit (CAD) majorly by this external cash flows was an risky option. India’s CAD for the quarter ended June narrowed sharply to $7.8 billion, or 1.7% of gross domestic product, from $21.8 billion (4.8 per cent of GDP) in the same quarter of the previous year.

The governor also had a word of caution on the nature of spending, especially that financed out of foreign resources and added the need to track trade deficit data closely. Moreover, he warned that if this money was mindlessly spent, then there was huge risk of running large deficits based on this foreign borrowing.

The country’s exports during the first five months of this financial year rose 7.31% to $134.79 billion, compared with $12.56 billion in the year-ago period, while Imports fell 2.69% from $196.22 billion to $190.94 billion. As a result, the trade deficit for the April-August period narrowed to $56.15 billion from $70.6 billion a year ago. The decline in CAD was mainly on account of reduction of this trade deficit data.

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