The Reserve Bank of India (RBI) today said future decisions on monetary easing will not only be driven by the inflation trajectory but also by the widening current account deficit.
"We will take into account what the CAD is. It (monetary easing) will not be driven just by inflation numbers or the inflation trajectory...," RBI governor Duvvuri Subbarao told analysts in the customary post-policy conference call.
He said: "The CAD has (not only) macroeconomic implications but (also) implications for price situation, inflation movement, and therefore for monetary policy. It will be difficult to say monetary policy will just look at inflation numbers and remain blind to all other variables..."
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Mr Subbarao added, however, that the central bank was not targeting any CAD number as such and wanted it to come down from the present high level of 5.4 per cent.
"We take into account external sector developments, including the size of CAD and the composition of CAD into the monetary policy action. But, we are not trying to target CAD (per se). We want it to come down from its current level but that will depend on a number of policy actions and not just the monetary policy," he said.
Urjit Patel, the newly-appointed deputy governor, who is in-charge of the monetary policy department at RBI, said both monetary as well as fiscal policy have implications for CAD.
"Monetary policy and fiscal policy both impact aggregate demand. Both have implications for the CAD..," Mr Patel said.
Unveiling the third quarter monetary policy yesterday, the governor sounded hawkish on more rate cuts, flagging his concerns on the widening CAD, saying the high deficit threatens macroeconomic stability and would stunt growth.
The CAD, which is measured by the difference between exports of goods, services and transfers to total import within a time period, touched a record high of 5.4 per cent of the GDP in the July-September quarter.
In fiscal year 2011-12 it was 4.2 per cent, but is at 4.7 per cent for the first half of the current fiscal year.
"Large fiscal deficits will accentuate the CAD risk, further crowd out private investment and stunt growth impulses," RBI said in its third quarter policy review and warned of a further rise in the final reading due to the continuous decline in exports.
"Domestically, the widening of the CAD to historically high levels in the context of a large fiscal deficit and slowing growth exposes the economy to the risks from twin deficits," RBI had said.
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