By C Shivkumar, Bangalore:
"The financial Stability Report released by the Reserve bank of India on Thursday has warned that India faced the risk of widening twin deficits financial and current account deficits.
The FSR attributed the widening of the deficits to the global developments rather than fiscal slippage. The FSR said the stress levels had increased the risks of slippage in the current year. The FSR warned that slowdown in revenue collections and potential rise in food, fertiliser and fuel subsidies made attaining the fiscal deficit target of 4.6 per cent challenging. The report noted that, for the first seven months of this year the revenue receipts were just 45.5 per cent of the budget estimates. For the corresponding period last year, it was 65.5 per cent of the estimates.
The report also said that although the government had increased market borrowings, Indian sovereign debt was sustainable, as it was mostly held by domestic institutions. Moreover, the average maturity of the debt was high and cost less than the average rate of growth of the GDP.
On the current account, the FSR said funding large deficits would necessitate higher capital flows into the country. The report said, The impact of risk aversion due to downward risk to the economic and financial conditions in the US and the Euro zone would be critical, particularly for FII flows to India.
The risks to current account escalation, the report said, were from a possible moderation in exports in the second half of this financial year, if the slowdown in advanced economies in turn weakened growth prospects of emerging market economies. It said that the receipts from invisibles also depended on the severity of the slowdown in the advanced economies. But the report added, that the depreciation of the rupee was likely to somewhat help cushioning the impact on Indian exports. What also worsened external deficit situation were high oil prices and sharp increase in imports of bullion, machinery and electronics into the country.
The report also said that the events in Europe had impacted the flow of external commercial borrowings into the country. Foreign sources of lending are getting reduced as a result of a rise in risk aversion. At the same time, the FSR pointed out that the net claims of non-residents on the country had increased by $14.2 billion in the quarter ended June over March this year.
Besides, the FSR also admitted that there has been flight of capital to safe havens thus deteriorating sentiment for emerging market currencies like the rupee. The report also noted that currency depreciation had impacted countries with high current account deficits than those with surpluses.
But the report warned of a persistence of inflationary pressures. This was despite the fact that inflationary pressures had started easing from this month onwards. However, report said, Uncertainties about sudden adverse developments remain and inflation risks continue to be high. The report also emphasised the impact of exchange rate depreciation on inflation. The report said that periodic increase in petrol, diesel and minimum support prices had a cascading effect on the economy."
India facing risk of widening deficits | mydigitalfc.com
"The financial Stability Report released by the Reserve bank of India on Thursday has warned that India faced the risk of widening twin deficits financial and current account deficits.
The FSR attributed the widening of the deficits to the global developments rather than fiscal slippage. The FSR said the stress levels had increased the risks of slippage in the current year. The FSR warned that slowdown in revenue collections and potential rise in food, fertiliser and fuel subsidies made attaining the fiscal deficit target of 4.6 per cent challenging. The report noted that, for the first seven months of this year the revenue receipts were just 45.5 per cent of the budget estimates. For the corresponding period last year, it was 65.5 per cent of the estimates.
The report also said that although the government had increased market borrowings, Indian sovereign debt was sustainable, as it was mostly held by domestic institutions. Moreover, the average maturity of the debt was high and cost less than the average rate of growth of the GDP.
On the current account, the FSR said funding large deficits would necessitate higher capital flows into the country. The report said, The impact of risk aversion due to downward risk to the economic and financial conditions in the US and the Euro zone would be critical, particularly for FII flows to India.
The risks to current account escalation, the report said, were from a possible moderation in exports in the second half of this financial year, if the slowdown in advanced economies in turn weakened growth prospects of emerging market economies. It said that the receipts from invisibles also depended on the severity of the slowdown in the advanced economies. But the report added, that the depreciation of the rupee was likely to somewhat help cushioning the impact on Indian exports. What also worsened external deficit situation were high oil prices and sharp increase in imports of bullion, machinery and electronics into the country.
The report also said that the events in Europe had impacted the flow of external commercial borrowings into the country. Foreign sources of lending are getting reduced as a result of a rise in risk aversion. At the same time, the FSR pointed out that the net claims of non-residents on the country had increased by $14.2 billion in the quarter ended June over March this year.
Besides, the FSR also admitted that there has been flight of capital to safe havens thus deteriorating sentiment for emerging market currencies like the rupee. The report also noted that currency depreciation had impacted countries with high current account deficits than those with surpluses.
But the report warned of a persistence of inflationary pressures. This was despite the fact that inflationary pressures had started easing from this month onwards. However, report said, Uncertainties about sudden adverse developments remain and inflation risks continue to be high. The report also emphasised the impact of exchange rate depreciation on inflation. The report said that periodic increase in petrol, diesel and minimum support prices had a cascading effect on the economy."
India facing risk of widening deficits | mydigitalfc.com
