INDIA BUSINESS WORLD - JULY 2006
THE MONTH THAT WAS...

CURRENT ACCOUNT WILL BE IN RED: RBI

THE government's projection of a continuing deficit in the current account could impact the flow of FII funds in the economy.

The high-level committee on shortterm balance of payments (BoP) has projected that the current account would stay in the red for this fiscal. The recent BoP figures released by the Reserve Bank of India (RBI) also bears out this assessment. The committee made this projection at its quarterly review meeting.

But it also feels that the high growth rate of the GDP would ensure that the deficit would be at about the same percentage level as in 2005-06.

The committee is chaired by chief economic advisor Ashok Lahiri and includes deputy governor of RBI, Rakesh Mohan. The committee makes the projections for the BoP position on the basis of assumptions like the expected growth in exports and imports, net remittances into the economy and FDI and FII inflows and other factors.

The RBI's BoP figures show that the current account deficit of the economy has almost doubled to $10.6 billion in 2005-06, up from $5.4 billion in the previous year. At the current level, the deficit works out to about 1.3% of the GDP. It was 0.7% of the GDP in 2004-05.

Saugata Bhattacharya, vice-president, business & economic research, UTI Bank, told that the persistence of the deficit in the current account could be a worry for FIIs. “A deficit in the current account would certainly translate into a weaker rupee, which could impact the returns for FIIs,” he said.

The government feels, that because of high international oil prices, the import bill will stay high for quite some time. Accordingly, the trade deficit will also stay high, at about the same level of 2005-06 at $51.6 billion. The first quarter export-import data shows a trade deficit of $12.6 billion.

The ministry has also stuck to a 16 % cumulative target of exports for this fiscal, and a WPI-based inflation rate of 5-5.5%..