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Subbarao Says India Current-Account Gap May Reach Yearly Record

Reserve Bank of India Governor Duvvuri Subbarao comments on inflation, the current-account deficit and monetary policy. He was giving a speech to students in Mumbai today.

On the current-account deficit:

“Today, the external sector is vulnerable. Last year, the current-account deficit was 4.2 percent of gross domestic product. This year, 2012-13, we expect the current-account deficit is going to be significantly higher than that. So, it’s going to be historically the highest current-account deficit measured as a proportion of GDP.”

On economic situation:

“If you take the macro-economic context today, we’ll find that growth has moderated, inflation has come off from the peak but even at 7-plus percent is still high. Investment has not only decelerated but has actually declined. The external sector is very vulnerable. That’s the macro-economic context in which we have been formulating our monetary policy.

‘‘Declining growth demands that the Reserve Bank ease and reduce interest rates but stubborn inflation requires that we keep interest rates high. So, how do we calibrate that balance, how do we calibrate interest rates? That’s been a constant struggle at the Reserve Bank.”

On investment:

“Growth has slowed because consumption has fallen, net exports have fallen, and most importantly investment has declined. That is a matter of great concern because today’s investment is tomorrow’s production capacity. So if investment is not taking place today, our growth potential on the way forward is going to be hurt.”

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