India’s Rising Account Deficit Not Cause for Worry

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Nov. 15 – Despite comments earlier this month by Reserve Bank of India Governor Duvvuri Subbarao expressing concern over India’s growing account deficit, the Ministry of Finance has implemented new regulatory changes that allow increased levels of investment from foreign institutions.

Last month India doubled the amount that foreign institutions can invest in government treasuries from US$5 billion to US$10 billion while also increasing the amount that international mutual funds can place in Indian corporate bonds from US$5 billion to US$20 billion, a move that runs contrary to the economic strategies currently employed by many emerging markets.

“The policy has been reviewed in the context of India’s…increasing attractiveness as an investment destination and the need for additional financial resources for India’s infrastructure sector,” the ministry said.

Furthermore, Prime Minister Manmohan Singh said on the sidelines of the G20 summit in Seoul on Friday that the country’s current account deficit of about 2.5 percent to 3 percent of GDP “will and has been managed within limits of prudence.”

Indian stocks have been aided by over US$25 billion of foreign institutional inflows since January 1, driving up the country’s benchmark Mumbai Sensex 17.5 percent to make it one of Asia’s best performing markets. The country’s GDP is set to rise 8.5 percent this fiscal ending in March, up from 7.4 percent last year.

“If India wants to continue with a high growth of over 9 percent without depending on exports, then it should learn to live with a high current account deficit,” Jahangir Aziz, chief economist at JPMorgan India, said in a Times of India report earlier this year.

“High current account deficits are a worry only if growth is not high or there are inadequate capital inflows to finance it,” he added.

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