Rupee can take a hit....the rising current account deficit

The Reserve Bank of India (RBI) in its monetary policy on 29th January cut the cash-reserve ratio (CRR) and repo rates by 25 basis points (0.25%). But at the same time it made very clear the various risks that the Indian economy faces. While inflation is certainly one of the key risks, the other equally worrying factor is the current account deficit (CAD).  

Indeed, as the chart  shows, CAD (as a % of GDP) has been continuously increasing over five consecutive quarters from July-September 2011 (2QFY12) to July-September 2012 (2QFY13). This is bound to have an adverse impact on the stability of the country's exchange rate at a time when domestic growth has also been slowing down.  

What is more, the rise in imports has largely been on account of fuel and gold imports. This is of more worrying to the RBI, than had the high CAD been on account of import of capital goods.

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